independent

Thursday 23 October 2014

How to save income tax

Published 26/07/2014 | 12:00

THE SEED CAPITAL INVESTMENT SCHEME - Part 2

This Scheme is a smaller version of the Employment and Incentive Scheme dealt with in Part 1.

It allows a person to invest in share capital of a company and set the cost of the investment against his tax bill of any of the 6 prior tax years.

Assume a person is made redundant getting a €30,000 lump sum in 2014 and has a good business idea based on his experience in previous employment.

The person sets up a company and invests the €30,000 lump sum in its share capital and starts trading. He then looks at the prior 6 years tax payments and offsets the €30,000 against his total income for one of the years.

If all paid at the top rate then he gets a refund of €30,000 @ 41% or €12,300. This is a personal refund to spend any way he wishes.

It will not come as a surprise that there are various conditions to be met in order to qualify for the Seed Capital Investment Scheme.

The individual must be fulltime employed by his new company and during the prior 3 years must have earned 75% of his total income under PAYE and he must not own more than 15% of any other trading company.

The company that he sets up must be engaged in a bone fide new venture and have the potential to create employment. It has also to get a certificate from Enterprise Ireland or a Local Enterprise Office or similar body indicating their approval of the project.

If the person finds that the initial share capital is too small then he can qualify for an Income Tax repayment a second time with a further investment. It can also be offset to the prior years. If the amount cannot be fully offset in any one year the excess can be brought forward to another year. In order to get the tax relief then the Revenue Commissioners will consider proposals in advance of the investment in the new company.

There has not been a great take-up on the Scheme, maybe because a person has to commit substantial funds to a company while they may consider it simpler to trade as a sole trader.

There must be a sound business proposition as the initial basis for the project. Usually it is based on prior work experience. There is no prohibition on the person bringing in other shareholders who may have funds available and do not wish to be actively involved. The person claiming the tax relief must own at least 15% of the company.

A person with a good proposal should first talk to a body such as the new Wicklow Local Enterprise Office - Tel. 0404 30800 prior to contacting the Revenue Commissioners.

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