Monday 20 November 2017

Business Brain: Tax relief rules give dig out for start-ups

Simon Ball

AS we approach a fourth year in recession, it might seem strange to see the present as a very positive time to trigger the entrepreneurial gene and start up your own business.

However with falling rents and consumers looking for ways to save money, the market is ripe for a niche start-up that serves a particular need.

Burger King, with its flame-broiled burgers, is a recession start-up from 1954. Today, the company operates more than 11,100 locations in 65 countries.

From a tax viewpoint, setting up a company in Ireland is quite advantageous. These rules can be most advantageous, particularly in those first three years when growing and preserving cashflow is of the utmost importance to any start-up.

To encourage new business activity in the traded sector of the Irish economy, the tax laws provide relief from corporation tax for start-up companies as long as certain requirements are met.

Relief from corporation tax in their first three years of operation for new companies:

•That are incorporated on or after October 14, 2008.

•Which commence a qualifying trade in 2011 (or 2009 and 2010).

•Whose corporation tax liabilities do not exceed specified levels (a corporation tax liability for a 12-month accounting period which does not exceed €40,000).

The Finance Act 2011 confirmed that the exemption for start-up companies from corporation tax was to be extended to companies that commence a new trade in 2011. The relief available is now linked to the amount of employer's PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee and an overall limit of €40,000.

Credit is also given for any employers' PRSI exempted under the Employer Job (PRSI) Incentive Scheme in respect of a company's employees in determining the amount of corporation tax relief available to the company.

The linking of the relief to the amount of employer's PRSI paid per employee is intended to target the relief at companies generating employment

It is important to note that, companies which set up and commenced their qualifying trade in 2009 or in 2010 will be able to obtain relief on the previous (i.e. pre-Finance Act 2011) basis for profits earned in accounting periods commencing before 2011, i.e. the exemption applies to exempt up to €40,000 corporation tax with no matter how much Employers' PRSI has been paid.

A qualifying trade does not include:

•A trade which was previously carried on by another person or formed part of another person's trade.

•A trade of dealing in or developing land or exploration and extraction of natural resources.

•A trade consisting of "service company". A service company includes companies whose businesses consist of the carrying on of a profession or the provision of professional services, or of exercising an office or employment. Service companies also include businesses that provide services to professionals.

Full relief is available to a new company in any of its first three years of operation where its total corporation tax liability for a 12-month accounting period does not exceed €40,000.

A qualifying new company with a corporation tax liability up to this amount will have its corporation tax liability reduced to nil. The maximum relief over three years is €120,000 (€100,000 for companies engaged in the transport sector).

There is a sliding scale of marginal relief where the corporation tax liability for a 12-month accounting period exceeds €40,000 but is less than €60,000.

A claim for relief must be made on the Corporation Tax (CTT1 Form). The claim must specify the amount of the relief being claimed for an accounting period. The relief must be within the limits set out in the legislation.

Simon Ball is a tax adviser and founder of SB Tax Consultants.

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