Start up Exemption for Companies

If you have recently started a new company, you may be able to apply for tax relief for start-up companies. This relief reduces corporation tax that may be due in the first five years that the company is trading, subject to certain conditions. The relief can be applied to profits earned from the trade of the company or on chargeable gains made on assets sold by the company that have been used for the purposes of the trade.

The main conditions for start-up relief include:

  • The company must be setup between 1 January 2009 and 31 December 2026,
  • The company must be carrying on a qualifying trade (excluded from this is trades inherited from previous owners/companies and land development but this is not exhaustive),
  • The company must pay employers PRSI on the salaries of employees, restricted to €5,000 per employee, and
  • The company’s corporation tax liability must not exceed the specified levels, i.e. Corporation tax of €40,000 in a tax year. Reduced relief may still be available if the company’s corporation tax liability is less than €60,000 in a tax year.

If a company qualifies for start up relief, then no corporation tax will be due from the company where the calculated corporation tax liability for the year in question is less than €40,000. Where a company’s corporation tax liability is between €40,000 and €60,000, then marginal relief may be available to the company to reduce their corporation tax bill.

Example:

Sexton Ltd is an Irish company setup on 1 January 2020 and prepares its accounts to 31 December. It is carrying on a new qualifying trade (of selling sandwiches).

Year 1: In 2020, it earned €10,000 in profits and employed three individuals. Tax due on these profits at 12.5% is €1,250.

As the company paid €4,000 in employers PRSI, it is entitled to claim a full relief for the corporation tax liability of €1,250.

Year 2: In 2021, the company earned €100,000 in profits and still employed three individuals. Tax due on these profits at 12.5% is €12,500.

As the company still paid €4,000 in employers PRSI, it is entitled to claim €4,000 of a deduction against it’s corporation tax return.

So in 2021, the company will be liable to pay €8,500 in corporation tax (€12,500 liability less start up relief of €4,000 via employers PRSI).

Start up relief can be quite valuable from a cashflow perspective for recently set up companies and it is important to remember to make a claim this relief in the company’s corporation tax return.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact us on 083 087 5936 or info@phairandco.ie.

Obligations of Company Directors who own 15% or more of a Company

Directors who own more than 15% of the ordinary share capital of a company (i.e. Proprietary Directors) are required to file an income tax return via Revenue’s Online Service (ROS) for every year that they continue to hold the directorship. This is still the case even if the director only earns PAYE income through a separate employment(s).

These income tax returns will require the disclosure of payments made by the company to the directors during the year in question, as well as expenses incurred for the benefit of the directors. Any income earned from other sources must also be disclosed, including foreign income, depending on the residency status of the director in question.

Strong penalties exist for proprietary directors who do not file their tax return on time. Revenue can impose a 5 or 10% surcharge on the income tax paid via the PAYE system (deducted via payroll) even though all the relevant liabilities have been deducted at source. Therefore, it is very important that proprietary directors ensure their filing obligations are made on time.

Exemptions from the obligation to file returns are available for certain directors of shelf companies, directors of genuinely dormant companies and others who take up temporary directorships in the period prior to a company commencing activity. The timing of commencement activities is a matter of fact and each case should be looked at on it’s own merits.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact us on 083 087 5936 or info@phairandco.ie.