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Tax Tips for SMEs
Tax reliefs or incentives available for start-ups
Aoife Lynn looks at some topical tax matters for SMEs.
1. Consider incorporating your business
If you operate your business as a sole trader, consider a change to a limited liability company and you can invest much higher amounts into your personal pension, which qualifies for tax relief. Tax on business profits will also be lower at 12.5%. There is a relief from Capital Gains Tax (which may only operate as a deferral of tax) on the incorporation of a business provided certain conditions are met.
2. Corporate tax exemption
New business start-ups that commence to carry out a new trade before 31 December 2015 should consider whether they qualify for the three-year corporate tax-free holiday. A company can get a full exemption from corporate tax where its corporate tax liability does not exceed €40,000. The full relief is linked to the amount of employer PRSI paid. Partial relief is available to a company where its corporate tax liability is between €40,000 and €60,000, with no relief being available where the corporate tax liability is €60,000 or more.
3. Funding requirement? How the Employment and Investment Incentive Scheme works
Funding can be raised through the Employment and Investment Incentive Scheme (EIIS) which provides tax relief to individuals for the purchase of new ordinary share capital in SMEs. The maximum level of funding that a company can raise through the EIIS is €15 million with the maximum level in any one year set at €5 million. The tax relief for the investors is 30%, subject to a maximum investment of €150,000. A further 10% tax relief is provided at the end of the holding period where it is proven that employment levels have increased at the company or the company has increased its expenditure on R&D. Investors must hold their shares in the company for four years.
4. Tax relief for being entrepreneurial? That’s the Seed Capital Scheme
Tax relief is available to individuals for setting up their own company. The Seed Capital Scheme (SCS) operates by relieving a sum of up to €600,000 against the total income of an individual which is used to subscribe for shares in a new company for any of the six years immediately preceding the year in which the investment is made. The maximum relief in any one tax year is €100,000. There are a number of conditions to be met by both the investor and the company in order for the relief to apply.
5. Get your pension plan right
Company directors that have a Personal Retirement Savings Account (PRSA) should consider switching to a one-man occupational plan instead of a PRSA and benefit from increased funding capacity and more-efficient employer contributions.
6. Employees working abroad? Consider the Foreign Earnings Deduction
If you are considering expansion of your business overseas, you should be aware that tax relief is available to employees who spend time working abroad in certain emerging countries. The Foreign Earnings Deduction (FED) is available to Irish-resident individuals who spend forty qualifying days working outside Ireland in emerging countries in a continuous twelve month period. The level of relief available to an individual employee is capped at €35,000 (tax saving at 40% is €14,000) for any one year.
7. Investing in capital expenditure? Act now to maximise capital allowances
It is worth reviewing a company’s fixed asset register to maximise its capital allowances claim. Capital allowances are a tax write-off for qualifying capital expenditure against profits and may be claimed in respect of expenditure incurred on plant and machinery (12.5% p.a.) and industrial buildings (4% p.a.). Accelerated capital allowances (i.e. a tax write-off given over a shorter period) are available on cars that have low CO emissions and for expenditure on certain energy-efficient equipment (e.g. electric and alternative-fuel vehicles, lighting, heating and ventilation systems).
8. Tax relief for being innovative? That’s Research and Development Tax credits
If your business is carrying out research and development (R&D), consider if the expenditure qualifies for the R&D tax credit. The tax credit is calculated at 25% of the expenditure incurred carrying on activities which meet specific scientific/technical criteria. The calculation is made retrospectively for the year preceding the current financial period. The resulting credit is then, in the first instance, deducted from a company’s corporate tax liability, but can, in certain circumstances, be received as a cash payment from Revenue.
Tax pitfalls when business is booming
9. Tax on director loans
Watch out for the tax issues surrounding loans to directors of close companies (companies controlled by five or fewer shareholders). Companies must pay a “deposit” to Revenue on loans made by the company to its shareholders of 25% of the net loan amount. A refund of this deposit can only be obtained when the loan is repaid by the shareholder. The company loses the deposit if the loan to the shareholder is written off.
10. Prepare for tax audits
If your business has been selected for audit, it is important to prepare correctly and disclose any errors or underpaid tax at the start of the audit. If this is done correctly, it will lower the cost to your business through significantly reduced penalties, non-publication on the list of tax defaulters and non-prosecution under criminal law. If your business has not been selected for audit but you discover errors resulting in underpaid tax, it is possible to make an unprompted voluntary disclosure.
11. Paying Directors’ Fees to non-residents? Ensure Irish payroll taxes are properly witheld
Any individual employed as a director of an Irish company is taxable on their directorship income in Ireland. Irish companies are obliged to withhold Irish payroll taxes, including PAYE/PRSI and the USC on directors’ fees, as and when they are paid.
12. Cash-flow difficulties? Consider VAT “cash-receipts” basis
Consider availing of the VAT “cash-receipts” basis to avoid the cash-flow difficulty of accounting for VAT on a supply when the invoice has not been paid by the customer.
13. Professional Services Withholding Tax – interim refunds
If your company provides professional services to certain public bodies, professional services withholding tax (PSWT) at a rate of 20% will be withheld. Credit for PSWT deducted is normally claimed when a company submits its tax return. Where you consider that the amount of PSWT deducted is in excess of the likely final tax liability, consider applying to Revenue for an interim refund of the excess rather than waiting to have it credited against the company’s final tax liability when its tax return is filed with Revenue.