Welcome to Money Matters, conversations about financial matters for startups with Roseann Heavey, a partner at Noone Casey.
Let’s talk about reliefs and tax breaks for startups.
There are several reliefs that entrepreneurs should avail of. The first one to note is the exemption from corporation tax in the first three years of operation. It grants startups a relief on paying the 12.5% corporate tax on their profits. It applies when the total amount of annual corporation tax does not exceed 40,000. In terms of sales, that means the income of the startup should be below 320,000.
Can a startup use pre-trading expenses to reduce their tax liability?
Yes, if these expenses are incurred in the first three years. Examples of eligible pre-trading expenses include: accountancy fees, advertising costs, costs of feasibility studies, costs of preparing business plans, rent paid for the premises from which the startup operates. If the company is making losses, these can be offset against income or foreign dividends that are taxable in either the same period, the one immediately preceding or the subsequent period.
What is Group Relief and how does it benefit startups?
Two companies are considered members of a group of companies if one company is a 75% subsidiary of the other company, or both companies are 75% subsidiaries of a third company. The Group Relief can be claimed in Ireland on a current year basis for trading losses, on excess management expenses, excess rental capital allowances and excess charges on income. The companies in the Group include those resident in Ireland, any EU Member State or any country which has a double taxation agreement with Ireland (like the US) and businesses quoted and traded on a recognised stock exchange.
Tell us about the Research & Development (R&D) Tax Credit.
The purpose of this tax credit is to encourage foreign and indigenous companies to undertake new or additional R&D activity in Ireland. Wages, related overheads, plant and machinery, as well as buildings all qualify as related costs and the R&D tax credit grants a 25% refund for them. The activity has to be in the field of science or technology and involve either basic and applied research, or experimental development. The Revenue Commissioners Office applies this credit quite strictly so detailed backup documentation needs to be provided with the claim. Once it is approved, the credit is subtracted from the corporation tax liability.
Is it strictly tied to the corporation tax liability?
If a company is either exempt from corporation tax or isnt making any profits, that same sum is given in cash to the company over a three-year period.
Can you give us an example of how a company gets cash back for its R&D investments?
I have a startup but I am not making sales yet. This year I have spent 60,000 on R&D. I file a corporation tax return, as every company should, regardless of whether they are making sales or not. I apply for the R&D tax credit for the 60,000. The Revenue Commissioners approve it, which means I’m owed a 15,000 R&D tax credit. Because I do not have a corporation tax liability to hold this against, the Revenue Commissioners gives me that 15,000 in cash over a three year period. In the first year I will get 33% of the credit due – 4,950 in cash. If the next year I have sales, the 10,000 left from my R&D credit will be used to offset what I owe as corporation tax. If I still fall under the three-year exemption or do not have sales, I get another 4,950 in cash. The same happens in the third year.
Have you seen any cases where someone is not eligible for the R&D credit?
Yes, which is why we have developed detailed questionnaires that help us determine if the client is eligible. We also prepare the reports on the expenditure that Revenue request. The whole process takes a couple of months once the return is filed.
If the Revenue Commissioners Office approves the claim, do they usually agree to the full amount?
Usually yes, however, there are times when they will not agree with the credit and will amend it. About 90% of tech startups are eligible for either the full amount or parts of it and they should certainly apply for it.
What other reliefs are there?
The next one is the Startup Relief for Entrepreneurs, (SURE). Individuals starting a company may be entitled to an income tax refund of up to 41% of the capital they invest in the company. We have a client who has been working on his startup for the past 18 months. He was in PAYE employment for years before that. He invested 100,000 through what is called a Directors loan for business expenses such as contractor fees, rent, and other. He applied for SURE based on that investment. In his case, the annual salary in 2015 was 100,000 and he had paid 29,532 in taxes on that sum. The investment he made in his startup is offset against the earning, and he received an income tax refund for the 29,532.
So the Directors loan was seen as an investment?
Yes. If the entrepreneur has invested personal resources, its considered a Directors loan and they can convert that loan to share capital. There are certain criteria that the company and the entrepreneur must adhere to for SURE. Over 50% of our clients have been approved for the relief.
Tell us about the Employment and Investment Incentive Scheme?
The Employment and Investment Incentive Scheme (EIIS) is a great way for startups to obtain initial investment. It is also a great investment vehicle for private investors. The EII scheme allows an individual investor to obtain income tax relief on investments for shares in qualifying companies up to a maximum of 150,000 per annum in each tax year up to 2020.
Is there a limit to the number of investors in one company?
No, there is no limit to the number of investors in one company, but the qualifying company can only raise a lifetime maximum of 15 million in risk finance using the EII scheme. Each investor can receive an initial relief of up to 30%, which is given out in the first year. The remaining 10% requires a few extra conditions and is given out after three years.
For an investment of 150,000, an investor will receive an income tax refund of 60,000, making the net cost of the investment 90,000. In return for their investment they typically receive Class B shares.
There is a new tax credit for self-employed and proprietary directors?
Yes, since January 2016. In its first year, it was capped at 550. In the 2017 Budget, that amount was increased to 950. That sum is taken off the taxable income.
There is another new tax relief, the Knowledge Development Box?
That one was introduced in 2015. It’s a tax relief on income from patents, copyright software and other intellectual property (IP) that is similar to an invention that could be patented. It only applies to companies that carried out R&D which led to the creation of patent software or IP. The profit arising from patents, copyrighted software or IP is taxed at 6.25% rather than 12.5%. If the company is exempt from corporation tax, the Knowledge Development Box does not apply.
Is there one more relief you think entrepreneurs should know about?
Yes, the Entrepreneur capital gains tax (CGT) relief. The standard rate of CGT in Ireland is 33%. The Entrepreneur CGT is at a reduced rate of 10% for everything that qualifies. It is aimed at encouraging entrepreneurs to invest and re-invest in assets used in new activities or companies. An example would be an exit, where the company is sold. The limit for the lower rate of 10% is capped at 1 million. The relief applies if the entrepreneur:
- has owned the business for a minimum of 3 years before the exit
- is a director or employee in a managerial or technical capacity
- has been in the company for a continuous period of 3 years
- has spent 50% or more of their time working for the company
- holds at least 5% of the ordinary shares in the business.
All of the reliefs and tax breaks above apply to 90% of all technology startups if they are structured properly.