Expansion not a Taxing Affair
Tax incentives are often overlooked as a valuable aid to investment at start-up and expansion stge. Recent changes to the Irish tax system could benefit small firms, writes Brenda Woods.
Tax incentives are often overlooked as a valuable aid to investment at start-up and expansion stage. For small companies intent on gaining a firm foothold on the slippery business ladder, this kind of support can be invaluable. But you can’t make use of the help an offer if you don’t know what’s out there. Brian Keegan, director of research at the Irish Taxation Institute, points to two recent changes to the Irish tax system that could benefit small businesses.
“Perhaps the change with widest relevance was the extension of the well-known Business Expansion Scheme (BES), and Seed Capital schemes, in the 2004 Finance Act” said Keegan.
BES relief, explained Keegan, provides a tax break for individual investors buying new shares in certain types of companies, usually manufacturing companies. It allows individual investors to obtain income tax relief on investments made in each tax year and, as such, is aimed at encouraging investment in smaller companies at either start-up or expansion stage. The scheme was originally scheduled to end this December but the finance act extended its lifetime for a further two years, to December 2006. In addition, the amount a company can raise under the scheme has been increased from €750,000 to €1 million. Although the amendment of the scheme represents a positive move, companies should be aware that the section of the Finance Act containing the relevant amendments will not become operative until the Minister for Finance signs a commencement order, giving effect to the section.
“This is to allow time for European Commission approval of the incentive. To date, the order has not been signed but there are indications that it won’t be delayed for too long,” Keegan said.
The Finance Act also introduced the all-new R&D credit scheme. The purpose of the scheme, Keegan explained, is to encourage and reward investment in research and development in research and development activities.
“For every euro spent on research above a certain threshold, 20 cent will be given as a credit against the company’s corporation tax liability. Moneys put towards building research and development facilities can also attract a tax credit”, he said.
However, the rules governing the types of investment that can qualify as R&D expenditure – for the purposes of the incentive – are strict. “There are two main tests. The first of these is that the activity must seek to achieve scientific or technological uncertainty”, said Keegan.
“The second test provides that the activity must resolve scientific or technological uncertainty.” “The Department of Enterprise Trade and Employment has published regulations giving further details, and the Revenue Commissioners have also published guidelines on the operation of the credit”.
Cathal Lawlor, tax manager at business and accountancy firm Mazars, advised small business owners to consider Seed Capital schemes as a useful way to avail of tax breaks.
“If you are leaving employment to set up a business, consider taking a tax-free termination payment. See if you qualify for a refund of PAYE paid under this scheme,” said Lawlor.
As well as the BES, Section 481 covering film tax breaks was also extended by the Minister for Finance last December. According to Lawlor, investing in either one might not be a bad idea. If you have taxable rental income, he said, it is also worthwhile considering the acquisition of a tax-based property investment.
‘If you are entitled to a refund of tax historically on unclaimed credits, allowances or reliefs, submit your claim now, as the Finance Act 2003 introduced a time limit for the claiming of repayments,’ said Lawlor. ‘Refund claims in respect of the tax years 1994/95 to 1999/00 must be made by December 31.’
If you are self-employed with an annual turnover of €300,000 or more, incorporating your business is, from a tax perspective, advisable.
‘It may be possible to use the Capital Gains Tax (CGT) retirement relief to realize a large tax-free gain,’ said Lawlor.
‘You can extract profits tax-efficiently by renting a premises to the company and sheltering the rental income with interest. ‘The company can make tax-deductible contributions to a director’s pension fund and the director will not be taxed on the benefit in kind. ‘Through a self-administered pension scheme, you can take cash out of your company, investing it in a scheme that is exempt from income tax and capital gains tax. ‘Benefits on retirement include the ability to draw down 25 per cent of the fund tax-free. On death, the fund will transfer to your estate. ‘The 2004 Finance Act removed restrictions that previously prohibited self-administered pension schemes from borrowing,’ said Lawlor. ‘Bear in mind that ‘two-income’ married couples can earn €56,000 at the standard 20 per cent tax rate,’ he added. ‘By contrast, ‘single income’ married couples are automatically taxed at the top tax rate once their income exceeds €37,000. ‘If you have additional investment income, such as rent or dividends, it may be possible to transfer the income generating asset to the non-earning spouse thereby maximizing the amount that is taxed at the lower rate,’ he said.
When Revenue audit time rolls round, Lawlor advises a pro-active approach.
‘Pre-empt the inspector by auditing the records and calculating any tax due before he does. Avoid prosecution and minimize penalties by making a full voluntary disclosure of all tax underpayments,’ he said.
‘Be aware that a gift of land or building may have a triple charge of tax- Capital Acquisitions Tax (CAT), Capital Gains Tax (CGT) and Stamp Duty. Tax may be avoided altogether if the property is passed by inheritance. ‘CAT can be avoided by taking a tax-free gift/inheritance of a house you have lived in for three years.’
CGT on all gains arising on disposal of assets between January 1 and September 30 must be paid in full by October 1 and December 31 must be paid by January 31 of the following year.
‘Consider deferring this disposal of assets, thereby postponing the payment date,’ said Lawlor.