Agenda. Irish tax landscape in 2018

Transcription

1 Tax for SMEs 2018

2 Agenda Irish tax landscape in 2018 Starting out in business Capital structure Timing tax registration Clever salary packages for founders and staff Opportunities for tax relief Expansion Funding the cost of expansion Attracting and retaining key hires Overseas trading planning and pitfalls Wealth management Retirement and succession planning 2

3 Ireland s tax landscape in 2018 Finance Act 2018 changes 3

4 Tax landscape 2018 Employee Self-employed Compliance PAYE File returns Marginal tax rate 52% 55% Effective tax rate > 125k 39% 41% Tax credits 1,650 1,150 PRSI Full benefits Limited benefits Compensation for failure Social welfare Limited Entrepreneur relief on sale N/A Yes 4

5 Revised standard rate bands

6 Revised USC rates 2018 Income up to 12, % (no change) 12,013 to 19,372 (next 7,360) 2% 19,373 to 70,044 (next 50,672) 4.75% Marginal rate up to 70,044 now 48.75% No amendments: Income less than 13,000 Income over 70,044 Income over 100,000 exempt 8% for employees / directors / self-employed 11% self-employed / non-employment income 6

7 Mortgage interest relief extension Relief due to expire 31 December 2017 Extended to 31 December 2020 Tapered relief on maximum relievable interest thresholds: % % %

8 Employers electric vehicle BIKs BIK exemption for provision of electric cars and vans between 1 January 2018 and 31 December 2018 BIK exemption on provision of facilities for charging electric vehicles on an employer s premises must be available to all employees and directors 8

9 Employers childcare/fitness facilities New tax incentive for employers on provision of childcare or fitness centre facilities by employer Cost of plant and equipment write off Year 1, not over 8 years Cost of construction write off over 7 years (high earners restriction for sole traders) Doesn t apply if employer business is in childcare/fitness sector 9

10 Employers PAYE Modernisation PAYE Modernisation project launched under Budget 2017 announcement in October 2016 Public consultation process report issued April 2017 Most changes effective from Payments, not earned basis, of accounting for PAYE (n/a to company owners) Employee election if potentially taxed in two tax years (eg bonus earned 2017 paid in Jan 2018) Anti-avoidance measures 10

11 Employers expense payments Mileage and subsistence paid to employees for work related travel Civil service rates changed 1 April 2017 Employers should review their policies and payments to see if expenses under- or overpaid potential exposure under Revenue audit 11

12 Farmers leasing of land for solar panels Concern leasing of land to solar panel companies in return for generous subsidies would deny farmers CGT and CAT tax reliefs on selling land or passing onto children From 2018, both retirement relief and CAT agricultural relief will still apply Does not apply to business property relief Not more than 50% of land can be planted with solar panels No income tax exemption on income from solar panel lettings 12

13 Property owners 13

14 Stamp duty increase Stamp duty on commercial property increased from 2% to 6% Conveyances and transfers after 11 October 2017 Transitional rules for binding contracts entered into before Budget Day and completed afterwards Affected assets: Commercial property Agricultural property consanguinity relief (1%) extended and no age limit Goodwill on transfer of business Repayment scheme if land subsequently developed for residential use 14

15 Rental income pre letting expenditure Expenditure incurred on rental property before date of first letting Interest Repairs etc. Deductible from rental income previous 12 months up to 5,000 Date of first letting after 25 December 2017 Clawback if property disposed of within 4 years 15

16 CGT holiday CGT exemption on property purchased between December 2011 and December 2014 no CGT if retained for 7 years Response to housing shortage incentive to free up property stock but applies to both residential and commercial property in the EEA CGT exemption now available on a sale between Year 4 and Year 7 16

17 Rental income pre letting expenditure Expenditure incurred on rental property before date of first letting Interest Repairs etc. Deductible from rental income previous 12 months up to 5,000 Date of first letting after 25 December 2017 Clawback if property disposed of within 4 years 17

18 Case study The Business Cycle Start up Expansion Exit 18

19 Meet Kathleen Senior manager with MNC.. But has a great business idea Business plan: Upfront costs capital, staff, general overhead Will be 3 months before cash positive 19

20 Tax based supports for new businesses Tax holidays on commencement Start up exemption for new companies Start Your Own Business for unincorporated businesses Raising capital EIIS (Employment and Investment Incentive Scheme) Seed Capital Scheme SURE Relief Intellectual property R&D Tax Credit Regime up to 37.5% tax relief on qualifying R&D expenditure KDB Knowledge Development Box 6.25% CT rate on income from qualifying IP assets Stamp duty exemption on acquisition of intangible assets Capital allowances on cost of acquiring external IP and capex on scientific research 20

21 Start up reliefs Unincorporated businesses New businesses set up and commenced between 25/10/2013 and 31/12/2018 Excludes businesses previously carried on by others Individual has been unemployed for previous 12 months and in receipt of certain social welfare payments First 40,000 of profits tax free p.a. for first two years of trading Companies New trade set up between 1/1/2009 and 31/12/2018 by a company Doesn t apply to professions Exemption from CT on profits up to 320k p.a. for 3 years Limited to employer PRSI paid up to 5k per employee Provision to carry forward relief to future years if loss-making initially 21

22 R&D Tax Credit Tax credit for 25% of qualifying R&D expenditure in addition to normal 12.5% tax deduction effective 37.5% Cash refunds over 3 years if no CT liability Limited to CT for past 10 years or payroll taxes in year of claim Administration Must be filed via company CT1 and usually via ROS Must make claim within 12 months of year end Administrated and policed by Revenue Documentation crucial 22

23 SURE Seed Capital Relief Available to the majority of small and medium-sized trading companies Previously employed individual subscribes for shares in their new company Refund of PAYE tax paid in previous 6 years up to 41% relief Max 100,000 investment p.a. (max two qualifying investments) total max. investment 700k ( 100k relief * 6 years on first investment 600k plus one further 100k investment in Year 2) if sufficient taxable income to absorb the relief Can apply to director loan converted to equity within 12 months Shares must be held for 4 years 23

24 Expense payments to non-exec directors Travel and subsistence payments to non-executive directors of companies Attendance at meetings in the State in capacity as director for purposes of conduct of affairs of the company Resident NEDs Civil service limits permitted on unvouched basis from 2017 Must be earning 5,000 or less emoluments from that company in tax year Non resident NEDs vouched basis only Exemption from income tax, USC and PRSI 24

25 Green energy capital allowances 100% write off in Year 1 compared with 8 years for other plant, machinery, equipment etc Extended to all trading persons, not just companies - from 1 January 2017 Relief due to expire 2017 extended to 2020 See for list of qualifying assets 25

26 Capital structure 26

27 Deciding on structure Incorporate or sole trader? How much capital needed and how much to take out? What is the business are there grants, tax incentives etc. available? Do some reliefs only apply to companies? Should you have a holding company / group structure? 27

28 Incorporation tax considerations Sole trader Company Basis of personal taxation All profits, whether used or not Drawings/salary only Tax rate Up to 55% 12.5% - 25% Close co. surcharge N/A 15% - 20% Tax credit for R&D None Worth 37.5% Relief for intangible assets None Yes Start up relief Limited Yes Entrepreneur relief on sale up to 1m gains Yes Yes 10% CGT CGT on sale 33% 33% or 0% sale of holdco 28

29 Incorporation other considerations Sole trader Company Pension planning Limited Greater scope Liability Unlimited Limited Share based funding (EIIS, seed capital etc) Not possible Possible Compliance and set up costs Less More Access to grants Very limited More Legal obligations and disclosures Less More 29

30 Have your cake and eat it? Start as sole trader, then incorporate relief for early losses BUT! Start up company exemption not available SURE n/a to sole traders Relief for pre-trading expenditure not carried over Possible CGT unless incorporation relief watch for non-trade debts 30

31 Incorporation new developments Various CGT reliefs available on incorporation Value attributable to goodwill on transfer to own company Personal goodwill Professional / business goodwill No entrepreneur relief or retirement relief unless can show bona fides commercial reasons for incorporation 31

32 Capital structure considerations Holding companies Participation exemption on exit Interaction with entrepreneur relief 5% v 51% holding requirement Financing Equity Share types ordinary, share caps, tying into succession plan Debt / quasi-debt preference shares / CLNs 32

33 What taxes to register for and when Income tax / Corporation tax at commencement of trade Trade commencement date important for some reliefs Decide on appropriate financial year end and know related compliance deadlines VAT when you ve decided to trade and before trading expenses are incurred so you get the VAT back on costs PAYE / PRSI when you ve decided to take on staff, including paying yourself a salary RCT if you are involved in certain construction, forestry or meat processing industries 33

34 VAT Registration required if turnover exceeds certain thresholds - Goods 75,000 - Services 37,500 VAT Rates 0%, 9%, 13.5%, 23%, exempt Filing requirements: - VAT 3 returns to be filed bi-monthly - Due date for filing is 19 th of month following end of period, e.g. Jan-Feb 2018 VAT 3 due to be filed by 19 th March Filing deadline is extended to 23 rd of the month if filed online via ROS - Option to pay by Direct Debit only one annual return required - Reduced frequency for smaller businesses - RTD (Return of Trading Details) to be filed annually - VIES / INTRASTAT for intra-eu imports / exports 34

35 VAT Invoice Basis pay VAT when invoice raised, regardless of when you get paid Cash Receipts Basis only pay VAT when you get paid Cash Receipts Basis conditions At least 90% non VAT-registered customers or Annual turnover less than 2m Significant improvement in cashflow 35

36 PAYE / PRSI / USC Registration as employer for both directors and employees PAYE PRSI USC (Universal Social Charge) P30 returns filed monthly by 14 th of month Extension to 23 rd of month if filing online via ROS P35 return filed annually Code of Practice for determining employed or self employed status Tip: Seek appropriate professional advice at start up there are other tax and legal obligations as an employer eg access to pension funds 36

37 Tax cashflow tips Early registration to get VAT back on costs Pay and file online Pay / file more or less frequently, depending on whether tax to pay or refund due Hire long term unemployed workers Using energy efficient equipment Be careful hiring contractors could be deemed employees VAT56B authorisation not waiting on VAT refunds 37

38 Contacting Revenue ROS MyEnquiries (self-assessed) / MyAccount (PAYE) Phone RTS Personal contact reduced 38

39 Clever salary packages eworking household bills, broadband, home office costs Civil service mileage and subsistence Non taxable BIKs (eg 500 vouchers, bike to work, travel passes, phones) Pension contributions Share schemes employer PRSI exemption 39

40 Kathleen s doing great! Expanding the business 40

41 Business Expansion Investment needed to expand into new markets Funding required for: More capex More people Retain key hires Develop overseas distribution channels 41

42 Financing the business FFF : founders, family, friends Kathleen director s loan or equity investment? Private investors / business angels tax incentives Debt Development agencies grants and equity investment Venture Capital Matching sources and uses Hold property self or company? Exit strategy 42

43 EIIS Relief Available to the majority of small and medium-sized trading companies Individual subscribes for ordinary shares in the company cost is written off against their total income Shares must be held for 4 years The maximum amount which can be raised through the issue of eligible shares is 15m; maximum of 5m per 12 month period Tax relief linked to number of employees Tax relief available for investors at 30%; increased by 10% after 3 years if employment or R&D expenditure increased Seed capital relief covered by same legislation Removed from high earners restriction Be mindful of interaction with entrepreneur relief Not available to founders and connected parties from November

44 Expanding overseas Branch or subsidiary? Permanent establishment Physical presence People on the ground what are they doing? Tax issues: double tax or relief for early losses BEPS VAT implications trade inside and outside EU VAT compliance Ireland, other countries, VIES / INTRASTAT returns Employees foreign PAYE obligations / exemptions / Treaty relief / FED BRICS states 44

45 VAT 56B authorisation Applies where 75% or more of a company s turnover arises from exports or intra community supplies of goods out of the state Effect is that none of your suppliers charge you VAT so you re not waiting for VAT refunds = cash flow advantage! Apply to Revenue for approval VAT56B authorisation will issue 45

46 Expanding overseas Leaving the SME world behind: CFC rules Transfer pricing rules Reporting reduced confidentiality 46

47 Rewarding and retaining employees Equity share? Type of incentive scheme Share awards Share options Phantom shares / growth shares / restricted stock units RSUs How to value a private company Protecting the employer Clogs, reverse vesting, forfeit, pre-emption rights 47

48 Giving employees shares Share options new KEEP Scheme Discounted shares RSUs, phantom shares, growth shares etc. Commercial protections forfeiture, vesting, reverse vesting 48

49 KEEP Share Option Scheme Tax efficient share option scheme for SMEs and private companies Employees given share option to acquire shares in employer company after 12 months No tax on grant or exercise previously 52% on exercise, payable within 30 days CGT on sale of shares Does apply to financial services or professional services (excl. engineering) T&Cs 49

50 Kathleen s thinking of retirement Strategies for wealth protection and transfer 50

51 Succession planning Identify exit opportunities and plan in advance succession or sale? Introducing family members to the business Restructuring the business for different service lines Should they be kept in separate subsidiaries? Tax reliefs for succession Business relief, retirement relief, entrepreneurs relief What to do with excess cash Pension planning CT deductions, STF and overfunding, ARF v annuity 51

52 Succession planning cash extraction Tax free termination payment Employer pension contributions Share buyback and retirement relief Improves business property relief / retirement relief asset mix 52

53 Exit strategy retirement relief Trade sale k limit; >66 500k Involve spouse before 55 Interaction with entrepreneur relief Introducing family members to the business tax reliefs 53

54 Entrepreneur relief Disposal of business assets Reduced rate of 10% on gains up to 1m lifetime limit Unincorporated businesses 3 year ownership requirement Company shares Ordinary shares owned for 3 years, and 5% shareholding, and Employee / director working more than 50% of their time for the company / group in a managerial or technical capacity for 3 / 5 previous years 54

55 Entrepreneur relief definitions Holding company: Business consists of holding shares of one or more 51% subsidiaries Qualifying group: EACH 51% subsidiary must carry on a qualifying business unless it is itself a holding company Qualifying business: Excludes holding of investments, holding of development land and development or letting of land 55

56 Entrepreneur relief Sophia established a medical device company in 2014, owning all ordinary shares on incorporation. Over the next 3 years, she executed her business plan, which required taking on significant external equity. Whilst she worked full time in the business, cashflow only allowed for a modest salary. The company also paid fees to a number of non-exec directors for attending Board meetings, who were also investors. In 2017, the share cap table was as follows: Sophia 51% ordinary share capital cost 100 Investors % ordinary share capital cost 1m Enterprise Ireland Preference shares The company was sold in 2017 for 5m 56

57 Entrepreneur relief example Sophia qualifies for revised Entrepreneur Relief as: Shares were sold and gain arose in 2017 Owned for more than 3 years Sale of more than 5% Worked in managerial / technical capacity for 3 out of previous 5 years Ignoring annual exemption, CGT liability calculated as follows: Capital gain 2,549,900 First 10% 100,000 Balance 33% 511,467 Total 611,467 Lifetime limit of 1m reached 33% CGT on future gains Other shareholders do not qualify due to working time criteria 33% 57

58 Exit strategy and company structure Sale of assets 33% tax in company and more tax to extract net proceeds. Purchaser pays 6% stamp duty Sale of shares Potential retirement relief or entrepreneur relief Sales proceeds directly to shareholders or holding company 1% stamp duty for purchaser = 5% tax saving for them 58

59 Exit strategy and company structure Reorganisation required if one company owning assets/trade(s) 5% stamp duty saving for purchaser Less due diligence time and costs purchaser takes over a new company with no trading history Reorganisation options: 1. Hive trade into separately owned newco and sell those shares Sales proceeds directly to shareholders Should qualify for retirement relief / entrepreneur relief as if sold oldco 2. Hive trade into new subsidiary and sell subsidiary Sales proceeds into holding company use to reinvest in new venture, fund pension etc. Need to consider future cash extraction 59

60 End of year tax planning Directors loans Pension payments self, staff, spouses Watch direct debits for VAT / PAYE interest charges Rebase capital assets and claim annual exemption 2,540 per person Trigger capital losses same year or before capital gains 3,000 p.a. tax free gifts Tax efficient policies of life insurance EIIS investment before year end 60

61 Easy wins Rebase shares annually to get 1,270 tax free gains per person 3,000 per person small gift exemption from CAT 500 non-cash BIK to employees no income tax, USC or employee/employer PRSI eworking, household bills, phones, health checks, spectacles, bike-to-work etc. Terminally ill clients death of assessable spouse = increased standard rate bands and tax credits; rebase base cost of assets held jointly to MV at date of death Tax shelters EIIS, SURE, pension contributions, artist exemption up to 50k, woodlands Be mindful of PRSI / USC if only income tax exempt Only timber not capital value of woodlands qualifies for exemption 61

62 Talking points Succession planning and implementation Company set up and exits reorganisations Beware of inadvertent loans to participators under arrangements for deferred payment of consideration CA14 / tax issues Returning emigrants planning for the return home if non resident 62

63 Conclusions Implement the right structure at the outset keep flexibility Be aware of compliance obligations at home and abroad to avoid unnecessary diversion of resources to dealing with tax problems Corporate structure gives more access to reliefs and funding opportunities, although increased compliance, regulation and disclosure Develop tax efficient salary packages everyone s happy! Start planning for retirement at least 10 years beforehand Plan for 30 years post retirement have you enough set aside and income streams created? 63

64 Questions? 64

65 Laura Lynch I Chartered Tax Advisor Managing Director Laura Lynch & Associates 3 rd Floor, Dockgate, Galway Tel: Mob: E: laura@lauralynch.ie W: 65