By Paul Molloy
Many small business owners have limited knowledge about tax. I have come across clients who have overpaid VAT for years, who are unaware of the many perfectly legitimate tax reliefs that are available to them and have limited access to this knowledge.
We’re aware from the business press about how little tax Apple has paid on their corporation tax. The reason Apple could do this is a result of the army of tax professionals they employ as well as their access to expertise from the Big Four accountancy firms (Deloitte, PWC, KPMG and Ernst & Young).
What’s available to the SME? They have a book-keeper or small accountant who they pay each year. The fee is usually small and the poor accountant has barely time to prepare the accounts from records kept in a biscuit tin – Jacobs being the favourite! – calculate the liability and arrange payment of this liability by the 31st October deadline.
Often the client will drop in the receipts in October which only adds to the pressure. The accountant simply doesn’t have the time or headspace to consider any tax reduction opportunities that may be available.
There is another issue of course. The accountant is skilled in preparing accounts and returns. They will often be unaware or at best unsure as to whether the client can avail of any tax reliefs, particularly the less common ones.
There is a misconception on behalf of the client that the accountant is all knowing about tax. Tax is about law. It involves applying the legislation of Tax Consolidation Act 1997 and other legislation to a scenario and drawing prudent conclusions from their observations. It is an entirely different skill set than that required of accountancy professionals.
If you needed back surgery or a cancer diagnosis, would you rely solely on your local doctor, your GP? Of course you wouldn’t; you’d go to the hospital or visit a surgeon.
The technology and capacity of the Revenue Commissioners is such that alerting SMEs to opportunities is not difficult and I will discuss some of these at the end of the article.
For now I would like to summarise three tax reliefs that should be on the radar of SMEs. These are the seed capital relief, retirement relief and inheritance tax. I would also like to propose some common sense measures that would enhance the value to SMEs without an onerous impact on the tax take which is vital in providing our public services.
The Start Up Refunds for Entrepreneurs (SURE) scheme is designed to assist those setting up a new business under a limited company structure. The relief is unavailable to sole traders. In essence, when an individual invests capital into their new business, they are in a position to recoup PAYE income had they been in employment for the past few years.
The individual, particularly, those paying at the higher rate of tax, can obtain vital cash flow once they meet certain criteria, primarily that they are taking a full time employment role in the new company and they invest in share capital as opposed to providing the company with a directors loan.
There are two problems here. Firstly, many SMEs will not know about this scheme or may not be able to work their way through the complex application process. Secondly, there is a narrow range of businesses that can avail of this relief. It is skewed towards research and development rather then general businesses and it’s not clear why Revenue make this distinction.
Retirement relief is very valuable in that it exempts those retiring from either a sole trade or limited company for paying any Capital Gains Tax (CGT) on selling their business or gifting it to a family member. You have to be 55 years of age to avail of this relief. The relief is available up to €750,000 when selling a business to a third party and when gifting or selling to a child of the seller, there is no such limit.
This relief is reasonably well known but the major limiting factor here is that the seller must be over 55 years of age. So you could have set up a business in your early 20’s, receive an offer to sell your business of €600,000 and have to pay approximately €200,000 in tax which seems very unfair.
There is another relief known as Entrepreneurial Relief from CGT with similar conditions to retirement relief where only 10% CGT arises on a sale and there are no age restrictions. The issue I have with this relief is that this will not be on the radar of many business owners or even their accountants.
When you inherit from a family member or someone with whom you don’t have a family relationship, you are exposed to considerable Capital Acquisitions Tax at 33%. If this inheritance is from your mother or father, you are allowed a tax free threshold of €310,000 combined.
If the inheritance is from someone other than your mother and father than you can expect to pay close to 33% on everything you inherit. Now there are certain exemptions, notably the dwelling house exemption, but the reality is that if you inherit property of some sort, you will most likely have to sell the property to pay the tax.
If the dead person’s estate contains assets such as life insurance policies or pension funds, a beneficiary can very easily overpay tax. I had a case recently where the solicitor handling the estate advised the beneficiary that they would have to pay CAT tax of approximately €20,000. When I investigated the matter, I discovered that one of the significant assets wasn’t taxable and so there was no liability to tax whatsoever. If a solicitor isn’t clear on the inheritance tax rules, how can we possibly expect an ordinary tax payer to know what their tax position is.
The recurring theme through these reliefs is that Revenue makes distinctions between similar tax payers that can result in big differences in terms of tax payable. I feel that many of these distinctions are arbitrary. For example, someone setting up a business containing R&D can avail of SURE relief whereas a consultant doing the same cannot. Why not allow relief for someone who hires an employee, regardless of of what type of business they do.
More fundamentally, why is there not greater education and communication made by Revenue to the many reliefs that are available out there? Why should one individual with access to professional tax advice save hundreds of thousands whilst the next individual without this advice pay hundreds of thousands.
It’s true we operate a self-assessment system in Ireland but Revenue have access to software that can advise individuals are different stages of their business in writing what they can avail of.
It’s almost as if Revenue is saying “We’ll allow you the tax relief you’re fully entitled to but you must be able to tell us the secret password!”
Why not just tell us the password?
Paul Molloy is a member of the Hibernia Forum and a tax adviser