Awareness of tax breaks and incentives available for start-up businesses can be the making or breaking of any new business.It’s good practice for start-ups to learn as much about the tax breaks and incentives they can avail of, as the tax charges they are liable to pay.
Apparently, although many new businesses are financed by the proceeds from redundancy cheques, few make use of the so-called ‘top-slicing’ relief that applies to the taxable element of the lump-sum payout.In the case of redundancy, the relief applying to the taxable element of the payout can be taxed at the average rate of tax over the preceding three years if it is more beneficial than the rate applying in the year the employment contract was terminated.This means if someone paid on average 31% tax on their income over three years, he or she could get a refund of 10% of a redundancy payment – the higher income tax rate of 41%, minus 10%. This relief can be claimed in the tax year following the one in which the redundancy payout was made.
The tax implications when choosing to operate as a sole trader or incorporate as a company. If someone expects to make a loss in the first year of operation, it is probably better from a tax perspective to consider setting up as a sole trader or under a partnership structure. Both of these allow losses in the business to be offset against other income arising in the same tax year or a spouse’s income.This means a loss of €20,000 could be offset against family PAYE income, resulting in tax refunds of up to €8,200.
In contrast, losses incurred by a limited company cannot be offset against personal earnings. However, if someone is looking for capital investment, such a structure can be more beneficial. Limited companies can also apply for tax relief under the Employment and Investment Scheme.
A sole trader must register for income tax by completing the TR1 form available from the Revenue Commissioners www.revenue.ie . October 31 is a key date for self-employed people:
- An income tax return for the previous year must be furnished
- The balance of tax for the previous year must be paid
- A preliminary tax payment for the current year must be paid
However, a newly-incorporated limited company does not have to pay any preliminary tax if its corporation tax liability is less than €200,000. This tax exemption introduced in Budget 2009 for start-up companies was an important development, as it provides for a three-year remission from taxation on profits and capital gains for companies with a tax liability of less than €40,000 per annum.
If a company has employees, it is liable to pay PAYE/PRSI and the new universal social charge (USC) on a monthly basis, unless Revenue deems a firm small enough to warrant a quarterly payment plan. The recruitment of certain new employees – the long-term unemployed, for example – entitles a company to avail of significant tax incentives.
A company may also have to register for value added tax (VAT), which is a tax on goods and services provided by the company. It is compulsory if turnover is greater than €37,500 for the provision of services and €75,000 for the provision of goods. Most activities attract VAT at 21% but some will have a reduced rates of 13.5% and 9%. VAT returns must be filed every two months but again depending on the size and nature of a business, there are advantages and disadvantages to filing in certain ways.Where turnover is less than €1m, VAT can be accounted for on the basis of cash received, rather than invoices issued, this can significantly improve Cashflow.
Particularly since 1 June all businesses should consider registering for the Revenue Online Service (ROS), which has been a major success in streamlining the tax system in recent years. Businesses that use this system also enjoy extended payment dates.
The new Employment and Investment Incentive (EII) scheme proposed in the Finance Act 2011 broadens the scope of the previous Business Expansion Scheme (BES), making it available to most small and medium sized firms.A company can now raise up to €10m in total under the scheme and up to €2.5m in any single year. Individuals may invest up to €150,000 a year and this limit applies to each spouse as long as they both have sufficient income in their own right. Where full tax relief cannot be availed of in a tax year, the excess can be carried forward to subsequent years. Shares must be held for three years and there will be a clawback of relief if they are sold within the three years. Relief for subscription to eligible shares has been reduced from 41% to 30%. Additional relief of 11% will also be granted if, at the end of the holding period, the company can show that the number of staff it employs has increased since the investment was made, or that it has increased its expenditure on research and development.
Seed Capital relief
This is aimed at encouraging would-be entrepreneurs. The relief is given by way of a deduction against total income for the six years preceding the cessation of employment. The maximum available is €100,000 a year, compared with €31,750 previously. A minimum shareholding of 15% for a year applies to anyone who wants to qualify for this relief. The scheme is due to end or come up for renewal on December 31, 2013.