Self Assessment Tax System >> Trading Through CompaniesTags: self employed, limited companies, directors
The principal benefit is limited liability for the debts of the business. In addition a new exemption from company taxation applies from 2009 for new business commencements. However, this will only be of benefit if the company has profits. If the owners take out the profit by way of salary or dividend the benefit of the exemption will be lost. Needless to say there are various rules and regulations attaching to this company tax exemption that need to be considered. We can give more detailed advice on the operation of the rules subject to an additional fee.
Another benefit is that companies pay tax on their profits at a rate of 12.5% compared to a top Income Tax/PRSI/USC rate of circa 55%. However this will only be available if profits are left in the company and not taken out by way of salary or dividend. Finally pensionfunding rules are different for companies and may be more beneficial than compared to the rules for the selfemployed.
For existing businesses carried on either as sole traders or in partnership transferring to a limited company can prove worthwhile and save tax as well. Where the existing owners qualify for the capital gains tax retirement relief, the business can be sold to your limited company and depending on values can ensure tax free benefits for the original owners.
On the downside there is a lot more red tape associated with trading through a limited company. The company has to make its own tax returns and also returns to the Companies Registration Office. There are numerous tax rules and regulations policing small limited companies. In addition company law rules are now also a major consideration when considering whether or not to carry on business through a limited company.
A Company Formation Agent can arrange for the setting up of a limited company on your behalf and the costs involved are relatively inexpensive generally costing a few hundred euro.
Once the company is formed the normal tax registration procedure is followed. The company must complete a Form TR2. However even though you may own the company for tax purposes you will be treated much the same as any employee for PAYE/PRSI purposes except for not being allowed the benefit of the PAYE employee tax credit. Any shareholder director who owns more than 15% of a company is not allowed the PAYE tax credit in respect of income received from that company.
The same rules and procedures apply for calculating a company's profits for tax purposes as already explained for a selfemployed person.However instead of tax years a company pays its tax by reference to its accounting period. A preliminary tax payment must be made in the second last month (by the 21st of that month) of its accounting period and the balance is payable nine months (by the 21st of that month) after the end of its accounting period. A company pays corporation tax at a rate of 12.5% on its trading profit. The profit is after deducting all allowable costs for directors e.g. salaries, pension payments etc. If a company has nontrading income e.g. rental income or deposit interest it pays tax thereon at 25%. There is also a further surcharge on nontrading income of 20% if the nontrade income is not paid out to the shareholders of the company by way of dividend.
4.1 Companies How Shareholder Directors pay Tax
A Shareholder Director in receipt of Directors salary is liable for PAYE/PRSI thereon like any other employee. Also they are not allowed the normal PAYE tax credit it they own more than 15% of the share capital of the company. A Shareholder Director who holds over 50% of the shares of the company will be liable for PRSI on the same basis as a selfemployed person i.e. no employers PRSI but PRSI charged on all income at a rate of 4%.
If a Shareholder/Director receives a dividend out of the after tax profits of the company the Income Tax/PRSI/USC due thereon is payable through the selfassessment tax system. A question that often arises is whether it is more beneficial to receive a dividend or Directors salary. For tax purposes the Directors salary although taxed under PAYE gives a lower tax liability than a dividend and it means the income can be included for pension funding calculations whereas a dividend cannot.
4.2 Family Members Working in the Company PRSI Implications
For PRSI purposes an important difference applies particularly for spouses of the Shareholder/Director as against a Sole Trader engaging family members in the business.
If a spouse receives income from a limited company both employers and employee PRSI may arise thereon. This is because the company is a separate legal entity from the owner of the business. The same applies to any children of the owner working in the business.
4.3 PRSI Refunds for Companies
Sometimes companies may be paying employers PRSI unnecessarily on salary payments to shareholder directors. Historically, employer PRSI may have been paid on all salary payments to director shareholders who did not own more than 50% of the share capital of the company. However, this may not be correct. In a recent case of a private company with four owner directors all under 50% shareholding we secured a PRSI refund of almost 1million for the company.
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Owner directors of private companies should always check the position for payment of Employers PRSI. There could be substantial refunds due. We can provide additional advice in this area, subject to an extra fee.
4.4 Use of Companies for Pension Funding
The use of companies for pension funding can be more effective than the tax relief available for the selfemployed. This is because of the way in which the rules for each category operate. For a company the important factors are the age of the director, level of salary and the length of service. The percentage limits and income cap which applies to the selfemployed are ignored for companies. The typical case in real life is where somebody has been running their business for a number of years and are at the stage where the business is generating a profit in excess of their normal salary requirement probably in their forties and are now considering pensions and retirement.
If they are already carrying on business through a limited company and have not made any provision for pension funding in the past there should be substantial scope for the company to make significant tax allowable contributions into a pension scheme for a director.
The use of selfadministered pension schemes allows people to take full control of their pensions and direct how the payments into the fund should be invested. This type of scheme is allowed borrow to make investments which has proved very popular for property investment.
The basic rules to be met when setting up a selfadministered scheme are as follows:
- Revenue approval for the scheme which should not be a problem unless you are attempting something unusual with your pension scheme.
- Appointment of an independent trustee for the scheme who must also be approved by the Revenue. The trustee sets up the scheme and deals with all the associated paper work.
- You must be at least a 5% shareholder in the company which is providing the scheme for you.
- All contributions to the scheme are subject to normal pension funding rules. The test here is not subject to the percentage age based limit and earnings cap which applies to Sole Traders and Partners.
- You are not allowed to sell personal assets to your pension scheme.
- There are restrictions on certain types of assets that the pension fund can invest in. For example prideinpossession articles e.g. antiques are not allowable investments.
- Various options are available at retirement age on how to deal with the accumulated pension fund. You can take a quarter of the fund tax free subject to certain limits. Your pension benefits e.g. tax free lump sum can be taken from age 60 onwards without actually retiring from your business.
When a family business is being transferred to the next generation the use of these schemes can prove very useful for both tax purposes and the longterm security for parents reducing their involvement in the family business.
As everybodys affairs are somewhat different we give more detailed advice on this area by way of consultation for which a separate charge will arise.
Expert Tax Library
- Self Assessment Tax System (Intro)
- Self Assessment Tax Rules for Paye Earners & Self Employed
- Sole Trader or Limited Company?
- Sole Trader
- Tax Registration
- Choosing Accounting Dates
- Family Members Working in a Business
- Running your Business from Home
- Self Employed - Pension Funding
- Special Rules when Ceasing Business
- Calculating Business Profits for Tax Purposes
- Value Added Tax (VAT)
- Trading Through Companies
- Deposit Interest
- Share Dividends
- Foreign Bank Accounts & Foreign Life Policies
- Revenue Tax Audits