Paying too much tax? Get in the know with L McGrath Accountants Ltd

For people who are self employed, and where profit from the business is significantly higher than personal drawings each year, it is advisable to review whether it is better to operate your business through a company going forward.

The benefits of using a company structure for your business are mainly lower profit taxes and limited liability. In this article we will only deal with the lower profit taxes.

The 12.5% corporation tax rate compares very favourably with current income tax rates on profits of for sole traders and partnerships, where income tax of 20% or 40%, universal social charge (USC) of up to 12%, and PRSI of 4% all currently apply.

These can combine to over 50% of taxes on profits of a sole trade or partnership, taxed at the marginal rate where business profits exceed standard rate tax bands. 

The current corporation tax rate of 12.5% is not much higher than the combined USC and PRSI rates, before we even consider income tax of 20% or 40%.

For this reason a lot of businesses are incorporating their business into a company. The process is not a complicated one.

The sole trade or partnership must be ceased and cessation accounts prepared for the final year, and the business de registered for all taxes.

A revision of profits may arise in certain circumstances and this would need to be considered. A new company can be set up relatively inexpensively, with a director(s) and secretary appointed to the board.

The directors are responsible to ensure that the company complies with company law and other law, and can be held personally liable for the debts of the company in certain circumstances.

The directors will open a new company bank account, register the company for corporation tax and employer taxes & Vat if required, and register all employees as employees of the company.

The business will continue to trade as normal and the business name can be transferred to the company. The company will be given a new tax number to be used on sales invoices and other documentation.

After 6 months a B1 must be submitted to the Companies office. The directors are required to submit an annual B1 with accompanying company accounts to the Companies office by the annual return date that each company is assigned.

Depending on the case, most businesses can file the company accounts without the need for an annual audit, as it can avail of the small company exemption.

However it is vital that the company accounts and returns are filed before the Annual Return Date (ARD) in order to avoid having to audit the company accounts.

Normally the business person will become one of the new directors of the company. He/She must continue to file an income tax return every year, to include their new company wage. Failure to do so will lead to a 10% surcharge on his/her income tax for that year.

The directors will be paid an agreed wage from the company. In addition the assets of the business can be transferred from the business person to the company at an agreed price.

Self Employed with Rental Properties? If either party owns rental houses or properties, the company route will work well to incorporate the business and pay income tax on the rental incomes.

This would need to be discussed in advance Excess profits not withdrawn from the company through director’s wages or dividends are taxed at 12.5% and will remain in the company.

These excess funds cannot be withdrawn from the company for use by the directors, without applying payroll or other income taxes, and this defeat’s the purpose of setting up the company in the first place.

Therefore after a number of years a company may have built up a fund of money, which can be used to invest further in the business to buy equipment, stock, etc without the need to borrow or invest in a pension or to buy property.

Depending on the circumstances of the case, there are a number of other considerations including VAT, CGT, service company surcharge, employees transferring to the company, how the company will pay for the assets, and other matters.

These issues would have to be dealt on a case by case basis, as there is no point in going into the detail of each scenario here.

Congratulations to Michael Tierney and Cathal McGrath on graduating from University of Limerick with an Honours Degree in Bachelors of Arts in Law and Accounting recently. Michael and Cathal work for L McGrath Accountants Ltd and are now pursuing their Chartered Accountants qualification.

Background

L McGrath Accountants Ltd, Chartered Certified Accountant’s and Chartered Tax Advisers, are a professional accountancy and taxation practice, operating for 35 years, and are based in Portlaoise & Roscrea.

We specialise in tax planning for our clients across all the main tax heads over the medium term, preparing 5 year tax plans for each client to ensure they pay the minimum overall tax over the medium term, and ensure clients tax affairs are filed up to date.

We can be contacted on 0505 22992 & 089 9842621 or email info@lmcgrath.com or visit our website.

Disclaimer

The above is a general non technical summary of incorporating a business. You should always seek professional advice when tax planning, as different circumstances give rise to different issues to be addressed.

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