Your company is ready to grow, but taking it to the next level means greater tax obligations. Tax expert Olivia Lynch offers ten pointers.
As a business grows and expands into new markets, tax takes on increasing importance – both to ensure that all tax compliance obligations are met, but also to ensure that the business is using all the various tax reliefs that are available. Growth brings tax opportunities and obligations for your business. With some forward planning, you can make sure your business benefits from tax breaks and avoids costly compliance mistakes. These are our top ten picks of matters to consider for a growing business.
Ireland’s much-touted 12.5 per cent tax rate only applies to the trading profits of companies. This compares to up to 55 per cent tax on the trading profits of individuals. Lower taxes leave more after-tax money to reinvest in an expanding business. In addition, some business-related tax reliefs are only available to companies Incorporation might seem like the obvious route, but the tax and commercial pros and cons should be weighed up carefully. If owner-directors and other shareholders regularly extract cash from the company through salary or dividends, then the overall tax cost might be higher than if the business was unincorporated. In some cases, extra tax charges at 20 per cent apply to certain types of company income (e.g., rents, interest and dividends) or at 7.5 per cent to certain types of company business profits. Take advice to see if these ‘close company’ rules apply to your SME.
Consider the suitability of your investment structure from the very beginning. If you decide to trade through a company, it could be beneficial to hold the shares in that company through a personal holding company. This can allow serial entrepreneurs to sell a business and reinvest in a new venture without a 33 per cent capital gains tax hit. You can also use your personal holding company to get family members involved in the business, this approach may also deliver gift tax and administrative benefits. If all of your investments are owned by the personal holding company, there is an increased opportunity to benefit from tax relief on any trading losses across your full portfolio. Seek advice early on to maximise the benefits.
New companies that start a new trade between 2009 and 2015 may qualify for a tax exemption on trading profits of up to €960,000. This applies to the first three years for which the trade is carried out, provided that the annual tax liability is €40,000 or less. Certain capital gains also qualify for exemption. The company needs at least eight employees/directors each year to fully benefit from the basic exemption, due to a link with employer’s PRSI contributions. Some relief still applies where the company’s annual tax liability is between €40,000 and €60,000. Remember, the relief is not suitable for individuals who transfer a business to a company, and not all activities qualify. Individuals who were unemployed for 12 months or more before starting their own unincorporated business can benefit from a similar relief (‘Start Your Own Business’ relief).
Access to finance still remains challenging for the SME sector, but some tax breaks can help encourage investment. The Employment and Investment Incentive Scheme (EIIS) provides up to 40 per cent tax relief over time to individuals investing in certain incorporated businesses. Changes in successive Finance Acts have made the relief more user-friendly, but challenges around scope and administrative aspects remain.
The maximum amount of funding that a company can raise through EIIS is now €15 million, subject to a cap of €5 million in any 12-month period. The tax relieved investment can be anywhere from €250 to €150,000 per annum. Generally, investors cannot be connected to the company. Individuals who make the move from employment to running their own incorporated business can benefit from SURE (Start-up Relief for Entrepreneurs); essentially a refund of income tax paid in the last six years up to a limit of €100,000 per annum. If benefiting from a grant, consider the tax impact. Will the grant be tax-free? Will grant funding affect tax relief on asset purchases?
The Research and Development (R&D) credit scheme encourages R&D investment by giving companies a tax credit of 25 per cent of the amount spent on R&D. The 25 per cent credit is available in addition to the usual 12.5 per cent tax relief for trading expenses, so the cost of R&D activities may be only €62.50 for every €100 spent. From 2015 onward, relief is no longer limited by reference to the level of historic R&D spend. The credit is generally offset against the company’s corporation tax liability, but can also deliver a refund of payroll taxes. The relief is not limited to lab work and can apply to R&D activities in a wide variety of science and technology areas.
The key is to be able to prove that the activities seek to achieve scientific or technological advancement or involve resolving uncertainty in these areas. Key employees who have been actively involved in R&D can benefit from an employee reward mechanism, effectively allowing them to receive part of their remuneration tax-free.
With a top combined tax rate of 52 per cent on employment income, employers are always searching for ways to remunerate their employees in a more tax efficient manner. There is now little difference between the tax charge arising on cash-based remuneration (e.g., salary, overtime, allowances) and non-cash benefits (such as company cars or private health insurance). Some exceptions are:
Incentivising employees by way of shares rather than cash provides numerous benefits. It aligns employee and employer objectives and can allow an employee to gain access to a future potential return in the company at a time when the value of the shares – and the tax charge – is low. Importantly from an employer perspective, share based remuneration can result in a 10.75 per cent employer PRSI saving for companies, compared to cash payments.
With life expectancy rates increasing significantly, it is becoming ever more important to start saving early for your future. Although tax reliefs for pensions have taken a considerable hit in recent years, pensions continue to be a very popular and efficient mechanism to provide for retirement. Options range from a Personal Retirement Savings Account (PRSA) to employer-driven occupational pension schemes.
Employer pension contributions are attractive from a tax perspective as they are not a taxable benefit for the employee and are fully tax deductible for the employer. Up to 40 per cent tax relief is available to the employee in respect of personal pension contributions. Tax relief for employee, but not employer, contributions are subject to age and income-related limits. Employees, including directors, should take care to remain within their lifetime tax relieved pension fund thresholds (€2 million in many cases).
Some 20 per cent of shareholders who are also directors of a company are prohibited from participating in the company’s occupational pension scheme. Small self-administered schemes are an attractive alternative, but involve additional conditions for Revenue approval.
If your SME has not yet registered for Irish VAT, increased sales might trigger a registration requirement. Thresholds are based on annual expected turnover and differ depending on whether your SME is supplying goods or services (€75,000 and €35,000 respectively). Check whether your purchases (especially from abroad) might trigger a registration requirement or whether your supplies might be VAT exempt.
With five different Irish rates of VAT and ever-changing legislation, Ireland’s VAT system is one of the most complex in Europe. Seek appropriate VAT advice at every stage of your SME’s expansion to ensure that: VAT registration and compliance is managed in as painless a way as possible; that the correct rate of VAT is being charged on supplies to avoid any competitive disadvantages; and that VAT recovery on costs is being maximised. Importantly, as a business – and the volume of its transactions – grows, there are greater opportunities for managing VAT cash flow and maximising VAT savings.
Trading overseas is one path to growth for Irish SMEs. The profits of your business may be subject to tax in foreign countries if the business has a taxable presence or ‘permanent establishment’ there. This could dilute the benefit of Ireland’s 12.5 per cent corporate tax rate for your SME (most other countries you are likely to do business in have higher tax rates). Even if there isn’t tax to pay straight away on profits, your business may have tax registration, payroll taxes, VAT and other obligations. Take professional advice early on.
The Foreign Earnings Deduction (FED) could be used to incentivise employees of your SME who are spending time developing business overseas in certain countries. The FED can result in up to €35,000 of an individual’s employment package being income tax-free.
Olivia Lynch is tax partner for private Irish business with KPMG.