01 Sep 2017 | 03.02 pm
Interview: Bruce Stanley, HLB Sheehan Quinn
Expert tax counsel for business owners
01 Sep 2017 | 03.02 pm
Partner Bruce Stanley (pictured) heads the tax practice in HLB Sheehan Quinn. Here he outlines the tax issues top of mind with his clients and presents some good ideas for Budget 2018.
Funding business expansion is a key area for clients as they grow their operations. The ability to finance future ventures tax efficiently is a common query and particularly relevant in a recovering economy. The Irish holding company regime offers significant benefits and reliefs, but has to be navigated correctly as there can be unexpected pitfalls. Particular care is required with joint ventures when negotiating terms that provide a tax efficient outcome for both sides. Regulatory prohibition on the incorporation of some professions and the uncertainty around others can be a barrier for growth.
Privacy is another concern for many businesses and particularly directors. Legislation now requires certain accounts published with the CRO to include directors’ salaries. This is sensitive information for business owners and produces a security risk for high earners that should not be underestimated.
In addition to the publication of salaries, the provision of increased financial information may also impact on the competitive nature of a business. In the past, many companies used a non-filing structure, taking advantage of the ability of unlimited companies to be exempt from submitting accounts to the CRO. These structures have been adversely impacted by recent EU legislation and in their typical form no longer work. There are solutions to address these queries, but it remains a concern for clients.
Long term planning is generally based around maximising the value of the business and creating appropriate structures to facilitate a tax efficient exit strategy. The high level of personal tax rates makes corporate structures far more attractive to successful entrepreneurs. Exit strategies often look to capitalise on Retirement Relief or Revised Entrepreneurs Relief. These are capped at €750,000 and €1,000,000 respectively. There are other options, such as utilising trusts or even changing residence, with Portugal being a firm favourite. Due to the high rate of capital taxes and the relatively low thresholds for reliefs, these options are now more frequently explored.
The difficulty clients are facing is exacerbated by the ongoing uncertainty around the post-Brexit landscape. Each case is individual and concerns include import and export changes, staffing, logistics, competition, regulatory matters and the impact on current corporate structures. Without knowing exactly what is going to happen, putting an effective plan in place is a challenge. The first step has been to identify the potential threats, but also the prospective opportunities that may be provided by Brexit and considering the courses of action that could be followed depending on the outcome of negotiations.
The complexity of the VAT system is always an issue for clients. For small businesses starting off, and which complete their own returns, mistakes are common. These might not be picked up until 18 months later when their accounts are being prepared. The ever-increasing global nature of businesses means that cross-border VAT issues increase — and add a layer of complication. Employment costs and employer’s liability offer another challenge. Hiring external self-employed consultants is the preferred model in many sectors, but an area that is scrutinised by Revenue.
Planning for Retirement
Tax efficient exit strategies
There are two common tax reliefs used when exiting a business, being Retirement Relief and Revised Entrepreneurs’ Relief. The qualifying period for Retirement Relief is 10 years, so it should be part of the long term planning for business owners to ensure that they meet the criteria. Where a family business is run by a husband and wife, the reliefs can be availed of by both as long as they are both owners and meet the conditions. The asset portfolio of a business can also impact retirement relief.
We would recommend that all entrepreneurs consider their exit plan as early as possible. If the individual is expecting to realise significantly more than the reliefs allow, then alternate strategies may have to be considered or they could end up losing 33% of the their retirement fund in CGT.
Tax free lump sums can be paid to exiting employees, including company directors, and can be a nice supplement to retirement planning. Consideration should therefore be given to the cash reserves in the company to fund a termination payment.
Pension funding is often the first piece of planning that tax professionals learn. Funding through a corporate pension scheme is more attractive than through a personal pension plan. Tax free lump sums can be taken from pensions and it is also possible to receive certain pension payments tax free where an individual becomes non-resident. There are different pension products available and each have different rules attached. We would recommend a review of all pension funds for our clients approaching retirement to ensure that their products are appropriate for them.
An important part of any retirement plan is who is going to take over the business. If there is a sale to a third party, how should that be structured? As a once off payment or with an earn-out? Would there be a handover period and how long would this be expected to extend?
If there is no third party sale would the business be liquidated and how could value be recognised? If the sale is within the family to the next generation, does the client want to receive full value for the business or would there be a gift element? Does the client want to retain a shareholding or control in the short-term until they’re sure the business is in safe hands? If the client is seeking to extract value from the business but pass it to the next generation, how can this be achieved without burdening them with debt? In a sale to a related party how should the business be valued? Identifying a successor and ensuring that the appropriate structure is in place to facilitate that handover is essential planning.
Asset protection is a key business component once value has been created. This is particularly important where a client is approaching retirement age. Limited liability protects an individual’s assets from the company’s liabilities, but the business assets of the company are still at risk. This can be mitigated but has to be managed carefully. Protecting what you have built up to date should be of paramount importance to clients approaching retirement.
• Income Tax & PRSI — Our income tax rates remain high, which aligned with the cost of living results in an expensive workforce. A reduction in the marginal rate of income tax would be welcomed with the continued phasing out of the USC. A review of employer’s PRSI should also be actioned to help reduce the cost of employment for businesses. Equalisation of the PAYE allowance for proprietary directors should be introduced along with an opt-in for the self-employed to participate in full PRSI coverage for illness and disability benefits.
• Gift/ Inheritance Tax — Business relief is a tax relief that reduces the value of business property passing by way of gift or inheritance by 90% for tax purposes. This allows business assets to be given to the next generation without creating a large tax burden. Currently, to qualify for the relief the person(s) making the gift need to have owned the business property for five years (or two in the case of an inheritance). Eliminating this holding period would allow parents to invest in business assets for their children and set them up in a new venture. The children are required to hold the business assets (or replacements) for six years. If the six year post gift period is maintained, then this should ensure that tax efficient gifts are provided with the intention of creating new businesses in the state.
• Capital Gains Tax – There have been many calls to increase the threshold for Revised Entrepreneurs Relief. This relief allows for a reduced rate of 10% to apply on the sale of qualifying business assets up to a lifetime threshold of €1,000,000. The UK have a similar relief, which applies up to £10,000,000. In addition to increasing the threshold so that it is comparable with the UK, I would also like to see the conditions reviewed so that individuals with personal holding companies may qualify. Currently, if two individuals have separate personal holding companies, each owning 50% of a business, they won’t qualify for relief on the sale of the structure. However if an individual has a 5% direct holding they can.
• Corporate tax rate — The 12.5% corporation tax rate has been the backbone of Irish tax policy for many years and the commitment to the regime should be maintained.
• Tax on lending — Currently, if one company lends funds to another the lending company is taxed at up to 40% on the interest earned. The borrowing company may only get a 12.5% tax deduction for the interest paid. Consideration should be given to taxing interest earned at the rate applicable to the activity of the underlying investment. This may help make lending more attractive and encourage cash-rich companies to invest in other businesses and new ventures.
• VAT — The vat registration threshold limits should be increased to reduce the administrative burden on small businesses. Consideration should also be given to a flat rate scheme whereby small business would pay a fixed percentage of their turnover which should reduce compliance errors. The threshold for the cash receipts basis is currently €2m and should be increased. Asking businesses to pay VAT to the exchequer that they have not received can cause significant cash flow burdens particularly where debtors are slow to pay.
• Investment incentives — There are two incentives to invest in corporate trades, being Start-up Relief for Entrepreneurs (SURE) and Employment and Investment Scheme (EIS). These reliefs should be reviewed with a view to expanding the situations to which they apply and increasing the sums available for investment.