Planning your business tax strategy – what you need to know

Taxes must always be paid, but an effective tax strategy can ensure that you don’t pay any more than you need to.

Tax policy is always evolving. For instance, in Ireland, the Budget 2022, released in October last year, laid out plans to apply a new minimum effective corporate tax rate of 15%. While this is a raise of 2.5% – although it only applies to businesses with revenues in excess of €750 million – it is still less than many other nations in the European Union and the UK.

But with such evolution comes risks and opportunities for businesses in Ireland, and any chances must be analysed to see if there are any potential benefits for the company in terms of reducing their tax burden.

There are many ways in which businesses can reduce their tax burden too: many companies end up paying more tax than they could due to how they have been structured or not claiming relief to which they are entitled. This is why tax strategy planning is vitally important for businesses.

Our guide gives some tips for how small businesses can look to reduce their tax burden, which can then be used to invest in the business and help to grow the company faster.

If you want more advice on how to plan your business tax strategy, you can contact Malone & Co’s team, who are experts in Irish tax on … today.

Incorporate your business

While there are advantages to being a sole trader, tax isn’t always one of them, so it is worth considering incorporating the business and becoming a limited liability company instead. There are several benefits to this. Firstly, corporation tax is only 12.5%, then there is capital gains tax relief that can be claimed on a business incorporation under certain circumstances. Finally, in limited liability companies, higher amounts can be invested in a personal pension.

Start-up tax exemption

Start-ups in Ireland can qualify for a three-year exemption from paying corporation tax. Businesses with a tax liability of less than €40,000 can qualify for the full exemption. Partial relief can be claimed by businesses with a tax liability of €40-€60,000. Those businesses with a tax bill in excess of €60,000 are ineligible to claim.

In Budget 2022, corporation tax relief for certain start-ups was extended until December 31, 2026.

Claim any available tax credits

Businesses in certain sectors can take advantage of tax credits. The Irish government has put in place many pro-business policies over the years, including tax credits for fast-growing sectors. For instance, Budget 2022 announced the introduction a tax credit for businesses involved in the digital gaming sector, which has experienced rapid growth in Ireland in recent years. Here, businesses can claim a refundable corporation tax credit for money spent in the design, production and testing processes of a game. Relief is set at 32%, with expenditure allowed up to €25 million per product, although the minimum spend on a project must be €100 million, so it is not open to everyone. Note that also the relief cannot be claimed on games made primarily to advertise something or for gambling.

Consider claiming EIIS

The Employment and Investment Incentive Scheme (EIIS) is an initiative that gives tax relief to people who buy new ordinary shares in small- to medium-sized businesses.

Businesses can raise up to €15 million through the EIIS, although only €5 million can be raised in a single 12-month period. Investors can invest up to €150,000 and receive 30% tax relief on that. Another 10% tax relief can be claimed once the holding period has ended, if there is proof that the company has employed more people or spent more on research and development. Shares must the held by the investor for four years.

Pension planning

Pensions can easily be overlooked when thinking about business taxes. For example, directors who are signed up to a Personal Retirement Savings Account could benefit by changing that to a one-man occupational plan, which has a higher funding capacity as employer contributions are more efficient.

Capital allowances

If your business has a lot of fixed assets such as machinery, equipment and premises, then it is worth investigating your capital allowances claim. Capital allowances are a tax write-off, which is calculated on the net cost of an asset or building. Capital allowances can be claimed on items such as: plant and machinery; cars, vans and trucks, software, industrial buildings and certain intangible assets such as copyrights and trademarks.

Capital allowances can be claimed at 12.5% over eight years for plant and machinery and 4% over 25 years for industrial buildings.

In addition, accelerated capital allowance of 100% can be claimed on certain assets, such as alternatively fuelled vehicles, gas-powered vehicles and the equipment required to refuel them, and equipment bought by a business for an employee creche or gym.

Tax credits for R&D

Many businesses undertake research and development (R&D) into new products, and some of the cost of this could be claimed back thanks to the R&D tax credit. The credit can see 25% of the money spent returned, although it is limited to R&D into certain scientific and technical fields.

The tax credit is calculated against the year before the current financial year. The credit is taken from the business corporation tax liability, although it can also be paid in cash by the Revenue.

Avoid common tax pitfalls

There are also certain tax pitfalls that businesses can unwittingly fall into; it is easily done, if a business is growing quickly, the focus can be on that, rather than the minutiae of tax, but it can be a costly mistake.

For instance, director’s loans can be a minefield, especially close companies – those with five or fewer shareholders. Here, when loans are made to a director, the business must pay the Revenue a 25% ‘deposit’ of the net amount of the loan. This amount is only refunded by the Revenue when the shareholder has repaid the loan. The deposit is lost if the loan amount is written off.

Another pitfall can come if a business has been chosen for audit. Care must be taken on preparing the accounts correctly and, if any underpaid tax is found, it should be disclosed at the beginning of the audit. This will lower any penalties and avoid any prosecutions.

If the business isn’t being audited but discovers an error that means tax has been underpaid, a voluntary disclosure can be made.

Get advice

As this article shows, the tax system in Ireland can be complex and finding ways to reduce a business’ tax bill can be difficult, which is why a tax strategy should be considered and, if it is, seeking the expertise of those with specialist knowledge of tax legislation is always worth doing.

Malone & Co Accountants https://www.maloneaccountants.ie/ can assist on all the relevant aspects of tax strategy planning and ensuring a business is as tax efficient as possible, as well as anything company-related, from setting up a company to providing diligence services as part of an M&A deal or funding round. We can also provide in-depth information to ensure any deal achieves the value hoped for at the outset.