This section provides a summary introduction to the following tax planning topics:
- Initial share structure
- Start-up refunds for entrepreneurs (“SURE”) / seed capital relief
- Employment and investment incentive scheme (“EIIS”)
- Employee share schemes
- Start-up company relief
- Tax registration
Initial Share Structure
We hope that your business will be a phenomenal success and that after a few years trading its shares will have appreciated greatly in value. Depending on your personal circumstances you may wish to involve family members or other parties in the business either immediately or at a future date. Alternatively, or additionally, you may wish to plan for a future exit, to retire or reinvest the proceeds of your business in a new venture. Appropriate advance planning may allow you to achieve your goals in a tax efficient manner. It is best to take tax advice as early as possible as delays in putting an appropriate structure in place may lead to higher tax charges at a later date.
Startup Refunds for Entrepreneurs / Seed Capital Relief
Where you invest money in your Company in the form of share capital (rather than by loan) you may be able to claim a refund of income tax. A relief known as SURE and formerly known as seed capital relief, may entitle you to a refund of income tax paid by you in the six years prior to the share subscription. The following are the main conditions which must be satisfied:
- Establish a new company carrying on a qualifying trading activity
- Have mainly PAYE income in the previous four years. This would include a person currently in PAYE type employment, an unemployed person, a person recently made redundant or a retired person
- Take up full-time employment in the new company either as a director or an employee
- Invest cash into the new company by way of purchase of new shares
Other conditions must also be satisfied.
Employment and Investment Incentive Scheme (EIIS)
You may wish to attract outside investment from private investors. The EIIS may be used to incentivise investors to subscribe for shares in your Company by providing them with a relief against income tax for their investment. Investors may be able to obtain a tax refund of up to 40% of their investment. The tax relief is claimed in two tranches, up to 30% can be claimed for the year of investment, and a potential second tranche of up to 10% may be claimed in year four if the Company has satisfied certain criteria concerning increased numbers of employees and employee wages. EIIS is subject to many conditions and specific advice should be taken.
Employee Share Schemes
Employee share schemes are a means to attract, incentivise, retain and reward employees. The tax treatment varies depending on the type of scheme used, and there are advantages and disadvantages to each type of scheme. As your business grows you may wish to consider putting an employee share scheme in place. We recommend you take advice before offering or implementing any employee share scheme.
Startup Company Relief
Start-up company relief is a relief for the company against the company’s corporation tax liability. Relief of up to €40,000 is available per annum for the first three years of trading (with marginal relief where the corporation tax liability is between €40,000 and €60,000). Unused relief is available for carry forward. The trade must be a new trade. The relief is also not available for certain trading activities, in particular professional services.
One difficulty with the relief is that it is linked to the amount of employers’ 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. Therefore it is of limited benefit to many smaller start-up companies which often have only proprietary directors on payroll. This is because employers’ PRSI (10.75%) is not charged on proprietary directors’ pay.
Most companies are required to register for the following taxes.
- Corporation Tax:
The profits of your company’s trade (income less allowable expenses (e.g. director’s salary, professional fees etc.)) should be subject to tax at the rate of 12.5%. Profits from certain excepted trades and from passive income (interest, rental income) are taxed at 25%. If the profits are accumulated in the company then additional close company surcharges may arise depending on the type of income and other factors. A corporation tax return (CT1) must be filed annually. The deadline depends on the accounting year end of the company. Companies with a 31 December year end must generally file their return and pay the balance of their tax by the 23 September of the following year. A start-up company does not have to pay preliminary tax for its first accounting period. However in subsequent years it will have to pay preliminary tax by the 23 day of the 11th month of its financial year (i.e. the 23 November for 31 December year end companies). Preliminary tax of not less than 100% of the preceding year’s liability or 90% of the current year’s liability must be paid or interest will accrue. ‘Large Companies’ (those with liabilities over €200,000) are subject to different rules.
- Employer’s PAYE:
Directors’ remuneration will be subject to PAYE, and so the company must register for and operate PAYE (i.e. the company must deduct income tax, USC and PRSI from their salaries and remit this to revenue). Employer’s PRSI (10.75%) is not chargeable on the pay of a ‘proprietary director’. In very broad terms, a proprietary director is a director of a company who is able to directly or indirectly control more than 15% of the ordinary shares company. Periodic P30 returns must be filed. Larger businesses will file these monthly. Smaller businesses can apply to file these at longer intervals. An annual P35 return must also be filed.
VAT is a sales tax. Businesses whose turnover exceeds or is likely to exceed certain thresholds are generally obliged to register for and apply VAT on their sales.
The turnover threshold for a sale of ‘services’ business is €37,500
The turnover threshold for a sale of ‘goods’ business is €75,000
Where the business supplies both goods and services then the threshold is €75,000 provided that at least 90% of the turnover is from the sale of goods, otherwise the threshold is €37,500
Businesses whose turnover is less than the appropriate threshold can still elect to register for VAT. The advantage of registering for VAT is that it allows the business to recover input VAT on goods and services purchased for the purposes of its VATable activities.
There are a limited number of business activities which are exempt from VAT (e.g. certain medical and financial services). Businesses cannot register for VAT in respect of exempt activities, nor can they recover input VAT on purchases made for the purposes of an exempt activity.
Periodic VAT3 returns must be filed, generally every two months. Smaller businesses can apply to file these at longer intervals. An annual RTD (return of trading details) must also be filed.
- Income Tax Registration for the Proprietary Director:
As a proprietary director (a shareholder or a director of your start-up) you will be obliged to register for Income Tax and to file an annual Income Tax return (Form 11).