Tax Tips – Corporation Tax
Although Ireland enjoys one of the more favourable corporation tax rates (currently 12.5% on trading profits) in Europe, more and more Irish businesses are finding the end of year tax bill to be a significant drain on cash flow. In order to assist companies in managing this end of year tax bill,one should follow these tips:
Corporation Tax Exemption for Start Up Companies
In 2009 the government introduced an exemption from corporation tax for the first three years of trading for certain new start-up companies. Companies that qualified for the relief were exempt from corporation tax on trading profits (and also chargeable gains on the disposal of assets used for the new trade) where the total amount of corporation tax does not exceed €40,000, which equates to €320,000 in trading profits.
Where corporation tax for the period is between €40,000 and €60,000, marginal relief will apply. No relief is available where the corporation tax liability for the period exceeds €60,000.
Happily, the Finance Act 2011 extended the exemption for new companies commencing to trade in 2011, however with the addition of one extra qualifying criterion. In short, the 3 year relief from corporation tax for start-up companies is now linked to the amount of Employers PRSI paid by a company in an accounting period. Companies can reduce their corporation tax bill by the amount of Employers PRSI paid subject to a maximum of €5,000 per employee (and an overall total reduction of €40,000).
Research & Development (R&D) Tax Credit
Many companies do not realise that they might be carrying out research and development activities and as a result lose out on the opportunity to claim a substantial tax credit.
In Ireland, a 25% tax credit is available for expenditure for companies engaged in qualifying research and development undertaken within the European Economic Area. In simple terms this means that you can receive additional tax relief to the amount of 25% of the expenditure that you incur on research and development activities. This is a substantial saving.
The R&D tax credit will first be used to settle any corporation tax liability for the same accounting period. Any remaining amounts may be off set against corporation tax from previous years, carried forward against future corporation tax liabilities or directly refunded by Revenue.
Unfortunately, the R&D credit must be claimed within 12 months of the end of the accounting period in which the qualifying expenditure was incurred resulting in a lot of companies losing out on the tax credit. It is therefore important to review your company’s entitlement to this tax credit as soon as possible.
Purchase of energy efficient equipment
The annual allowance for expenditure on plant and machinery (i.e. capital allowances) stands at 12.5% in Ireland. This means that tax relief on the cost of an asset (e.g. air-con system, lighting systems, IT hardware etc) is granted over an eight year period instead of in the year of acquisition. A significant cash flow benefit arises where you are entitled to claim the full cost of the asset in Year 1, as your tax liability for that year will be reduced in one go rather than across 8 years.
In the case of assets in a category qualifying for accelerated capital allowances it is indeed possible to claim the full cost of the asset year 1. Examples of assets in this category are:
• Lighting and Building Energy Management Systems
• Information and Communications Technology
• Heating and Electricity Provision
• Process and Heating, Ventilation and Air-conditioning (HVAC) Control Systems
• Electric and Alternative Fuel Vehicles
• Motors and Drives
Companies planning on purchasing new equipment should therefore review whether it would be possible and beneficial to purchase new equipment which qualifies for the Accelerated Capital Allowance scheme.
Paying salaries v dividends
In Ireland the remuneration of individuals via salary payments is far more tax efficient than dividend payments. This is because companies receive a corporation tax deduction for salaries but not for dividends.
From a personal tax point of view, dividends and bonuses are treated very similar with no main tax advantage for receiving one over the other. Therefore it is better for a company to remunerate employees with salary payments rather than dividend payments.
Ensure provisions are “Specific” in nature
When preparing company accounts it is important to ensure all provisions are carefully documented and represent a reasonable estimate of future costs.
Under tax law, a provision may only be claimed as a corporation tax deduction provided it is specific in nature. General provisions which are not backed up by reasonable estimates should be added back in corporation tax computations resulting in no relief for the company in that year.
For example, a general provision for repairs which will occur in the following year may not be claimed. Whereas, a specific provision backed up by a reasonable estimate may be claimed as a qualifying corporation tax deduction.
If you wish to make a charitable donation it is better to do so through your limited company rather than in your own personal name. Provided the total donation to the same charity in one tax year is €250 or greater and is paid to an approved charity or other approved body the company may claim the donation as a trading expense.
Payment and Compliance
Avoid Revenue interest and charges by ensuring the company submits tax returns and pays all taxes on time. For example, automatic surcharges apply to late submission of corporation tax returns. These surcharges are based on your total corporation tax liability being charged at either 5% or 10% of your corporation tax liability depending on how late the corporation tax return is filed.
Purchase of motor vehicle with low level of carbon emissions
Where a decision has been made to purchase a company motor vehicle all attempts should be made to choose a vehicle with low C02 emissions.
The annual allowance for motor vehicles (other than cars in use in a taxi or car hire business) is dependent on which category of carbon dioxide (C02) emission they fall into.
If a company purchases a motor vehicle for €40,000 with C02 emissions of 195g/km it will not receive any deduction for the motor vehicle in the corporation tax computation.
If however the company purchases a motor vehicle with C02 emissions of 155g/km the company will receive capital allowances of €24,000 spread over 8 years, irrespective of how much the motor vehicle costs.
Maximise use of losses
Subject to certain conditions, trading losses may be carried back for utilisation against profits of the preceding tax year, resulting in a refund of corporation paid. Any unutilised losses may be carried forward indefinitely for offset against future company profits.
Get help from a tax expert
In order to ensure your company is availing of all available tax breaks and claiming all deductions it is recommended you hire a tax expert. Any good tax consultant should pay for themselves and more through the tax savings that they identify for you.