Smaller Companies Preliminary Tax
Start up companies enjoy certain benefits and concessions. If a company does not expect tax liability to exceed €200,000 in year one, it will have no preliminary tax obligation. The tax liability will be due with the corporation tax return, eight months and 21 days after the end of the accounting period.
Small companies, are those whose tax liability in the preceding period does not exceed €200,000. They may base preliminary tax on 100% of the corresponding corporation tax in the prior years. A new company may have no preliminary tax liability if its profits does not exceed €200,000.Those with tax liability of less than €200,000 in the preceding period may opt to pay preliminary tax on the basis of the prior year’s corresponding liability or 90% of the current year liability.
For a small company the principal payment i.e. 100% of the preceding year or 90% of the current year, must be paid one month before the end of the accounting period. The balance is paid together with the return, eight months and 21 days after the end of the period of account.
Where the accounting period is different the accounting period is converted into a 12 month period by multiplying the profits up or downwards so that they are apportioned to 12 months.
Exemption in first three years
There is an exemption from corporation tax for start-up companies for the first three years of trading.. The profits are taxed at nil. Likewise gains on trading assets are taxed at nil.
FA 2009 provided for tax relief for new companies commencing to trade in the period from 2009 to 2011. FA 2012 extended the relief to the end of 2014.The terms of the exemption have been modified from time to time.
The exemption which was introduced in 2009, applies to qualifying trades and the disposal of assets used by them. The company must be incorporated after the 2008 budget. Relief applies to trading income and gains.
The relief will only apply where the profits do not exceed €40,000. Marginal relief applies to restrict the maximum amount of tax payable where the profits are between €40,000 and €60,000
Certain activities are excluded including agricultural and fisheries activity, exports related activities, road freight operations, businesses in difficulty. There is relief where the underpayment of preliminary tax is due to a disposal of an asset in the last month. A top up payment of preliminary tax may be made within one month of the accounting year
A trade set up by a new company, the activities of which, if carried on by an associated company of the new company would form part of an existing trade carried on by that associated company is excluded as and from FA 2011.
- must not have been carried out formerly by another person
- the activities of the trade must not have been carried out as part of another person’s trade or profession
- must not be an excepted trade (those subject to higher / 25% rate of tax see other sections)
- exceed €200,000 (state aid maximum) in a tax period
- must not have formed part of the trade of an associated company
- must not have been transferred to a connected person
Where it applies, the exemption reduces the corporation tax to nil. It applies only where the total amount of corporation tax does not exceed €40,000. Relief is granted between €40,000 and €60,000 by way of marginal relief. It applies for the first three years from commencement subject to conditions.
FA 2011 Act modified the provisions. In effect the maximum relief is €40,000 or if less the amount of PRSI paid subject to a maximum of €5000 in each accounting period for each employee or director. The relief was linked to the number of employees and the amount of employer’s PRSI contributions paid by the company in the accounting period. Where the corporation tax is less that €40,000, to maximize the relief available the company needs to have paid an aggregate of specified contributions, at least equal to this amount in the period.
This is computed by adding employer’s PRSI paid on behalf of each employee in the accounting period, subject to a maximum of €5,000. The minimum number of employees required to achieve €40,000 relief is therefore eight earning €46,512 (at FA 2011 PRSI rates).
The maximum allowed per employee is €5,000 and there is an overall limit of €40,000. If the employers PRSI paid in the accounting period is lower than the reduction in corporation tax otherwise allowed, relief is based on the lower amount. The objective was to ensure that the relief is targeted at companies that generate employment.
Where in the first three years, corporation tax does not exceed €40,000 (and is accordingly less than the maximum relief) and total employers PRSI exceeds the corporation tax liability for that period, the company may claim a reduction in the corporation tax liability for the trade after the third year, at the lesser of the total contributions for the relevant period, and the amount by which the total contributions exceed the corporation tax.
The aggregate contributions are the sum of employer’s PRSI to a maximum of €5,000 per employee. The effect of the FA 2013 amendments is to allow unused relief arising in the first three years to be carried forward. The maximum relief in any one year is not to exceed the employee’s PRSI in that year. The relief carried forward is restricted by the amount of the employer’s PRSI paid and the corporation tax liability during the first three years.
If the corporation tax in the first three years is between €40,000 and €60,000 and the PRSI contributions for the accounting period exceed the corporation tax payable for that period, the company may claim a reduction by way of marginal relief. Where such a claim is made and exceeds the corporation tax payable for that accounting period, the company may elect to carry the excess forward against corporation tax in the next period. The maximum reduction is the amount of the corporation tax itself.
Finance Act 2014 extended the relief until 31 December 2015. The three-year relief from corporation tax for new companies was extended to include companies commencing trade in 2015. Finance Act 2016 extended the relief until 31 December 2018. Finance Act extended the relief to 31st December 2021.
Finance act 2018 extends to three-year tax relief for start-up companies which commence a new trade in 2019 2020 or 2021.
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