I thank the Chair for allowing me to raise this matter on the Adjournment. We are all aware of the major role small businesses play in our economic welfare. We encourage small businesses and give them our support, but what they want is practical manifestation of that support. The best way to give that practical help is by financial means, which works more quickly than any other form of assistance.
It is because of the pressing need to give financial recognition to small businesses that I raise the matter on the Adjournment tonight. I am encouraged by the presence of the Minister of State, Deputy Durkan. However, I would prefer if the Minister for Enterprise and Employment was in the House to reply.
The small business sector has a long list of grievances. There is too much paperwork, the audit requirement should be removed and there is need for prompt payment procedures. While PAYE allowances for owner-workers and tax on dividends are of concern, top of the list is the payment of corporation tax at 38 per cent as well as the high rate of employers' PRSI. A corporation tax of 38 per cent is far too high and a review of similar taxes in other EU countries supports that. I would prefer, however, to examine our position on its merits, we do not need to copy the system of another country. We are well able to conceive and implement practical measures to assist the Exchequer and small businesses at the same time.
There is approximately one small business for every two persons seeking work. Assistance for the unemployed costs approximately £3,800 per person per annum. Small businesses cannot reinvest much more than 60 per cent of their profits in the business. The more successful a business, the more it requires cash to finance new stock, pay additional debtors and create new jobs. Small businesses must be allowed to expand and reinvest their profits in the business for working capital, new plant and equipment, premises, etc. A reduction of corporation tax to 10 per cent would mean a great deal to small business. It would enable them expand and develop with the inevitable creation of more jobs. This would not cost anything. In fact, the Exchequer and the wider economy would benefit greatly. I do not understand why the Government will not amend the Finance Acts. Is the solution too obvious?
I wish to elaborate on the net benefits to the Exchequer of such a measure. Initially, the Exchequer would lose corporation tax revenue but the last 2 per cent reduction in the rate of corporation tax cost the Exchequer £43 million. The banking sector, which formerly paid levies, gained most from that £43 million and it is now actively reducing payroll overheads by shedding jobs.
At present, small business contributes to and collects without charge VAT, PRSI, PAYE and VRT. Business owners pay more PAYE than other workers. They pay residential property tax and often risk their homes to finance and support their business. With greater availability of working capital, through the retention of after tax profits in the business, the Exchequer will gain tax revenue and will benefit from the creation of jobs. Every new job created means less will be spent on unemployment assistance and more will be received in PAYE, PRSI and VAT contributions which will result from increased spending power.
If the 120,000 to 150,000 small businesses in the State created only 10,000 new jobs, it would save the Exchequer £38 million per annum in unemployment costs and would benefit the Exchequer by at least a further £36 million. These amounts, totalling more than £74 million, would come if only one business in 12 created a new job. I have been unable to obtain from the Revenue Commissioners the cost of reducing corporation tax but I estimate it at substantially less than £70 million. Corporation tax for all non-manufacturing companies last year amounted to approximately £500 million.
One might ask why small business owners do not borrow for fixed and working capital requirements. While the answer is glaringly obvious to anyone with the merest acquaintance with small business, it would be helpful to outline the principal reasons. They include the following: the high cost of interest — on average 3 per cent more than for larger businesses; difficulty in making repayments while expanding — normal short term financing is a problem; the need for security — fixed assets are not often available other than the family home which will not be requested as security but would not be rejected if offered and, finally, difficulty in obtaining any loan.
Small business owners lease cars and equipment and rent factory premises. This is more expensive than outright purchase, which rarely is an option. However leasing, etc., cannot finance the purchase of stocks and factoring debtors is an expensive and not always suitable option.
The difficulty of defining small business is sometimes mentioned as a reason for not doing anything. The following are short workable definitions: not 75 per cent or more owned by a larger entity, as this would not meet the criteria; not more than 50 people employed in the previous two years — two part-time workers would equal one full-time worker for this purpose; a turnover of £1 million, excluding VAT, in the previous year.
It is important to emphasise that a reduction in corporation tax would only benefit the business if the money was reinvested. Money taken out of small companies is taxed.
I call on the Government to amend the Tax Acts to provide for a 10 per cent rate of corporation tax for qualifying small business in order to reduce unemployment. We have approximately 80,000 small manufacturing companies here out of a total of 106,000 small businesses. I understand that Sweden and Norway have a scale of tax to accommodate small business. In those countries, this is an area where jobs are being created and I urge the Government to come to the rescue of small business to enable it create much needed jobs.
