486C Relief from tax for certain start-up companies

Summary

This section, as introduced by Finance (No. 2) Act 2008, provides relief from corporation tax for new start-up companies for the first 3 years of operation. Relief is granted by reducing the corporation tax on the profits of the new trade and gains on the disposal of any assets used for the purpose of the new trade.

Prior to Finance Act 2011, full relief was available where the corporation tax otherwise payable by the company was €40,000 or less. Marginal relief applied where the corporation tax liability was between €40,000 and €60,000.

The relief applies to new ventures only and relief cannot be claimed in respect of a trade or part of a trade that was previously carried on by another person. The relief is also unavailable to companies involved in dealing in or developing land, to companies involved in exploration and extraction of natural resources or to companies carrying on a profession, providing professional services or holding an office or employment – so called “service companies”.

Finance Act 2011 changes

Section 34 of the Finance Act 2011 provided for the extension of the tax relief for start-up companies to those companies which commence a trade in 2011. It also modified the existing relief so that the value of the relief is now linked to the amount of Employers’ PRSI paid by a company in an accounting period, subject to a maximum of €5,000 per employee and an overall limit of €40,000. Credit is also given for any employers’ PRSI exempted under the Employer Job (PRSI) Incentive Scheme in respect of a company’s employees in determining the amount of corporation tax relief available to the company.

The Finance Act 2011 changes above mean that where the total corporation tax payable by a qualifying start-up company for an accounting period does not exceed €40,000, the aggregate amount of corporation tax referable to income and gains¹ of the qualifying trade in that period will be reduced to nil or, if greater, to that aggregate as reduced by the amount of qualifying Employers’ PRSI. Where the total corporation tax payable exceeds €40,000 but does not exceed €60,000, the aggregate amount of corporation tax referable to income and gains¹ of the qualifying trade will be reduced to an amount as calculated in accordance with the original existing marginal relief formula or, if greater, to that aggregate as reduced by the amount of qualifying Employers’ PRSI. For accounting periods of less than 12 months, the various limits are proportionately reduced.

To ensure that the scheme is focussed appropriately on new business activities the section contains a provision which excludes from relief a trade set up by a new company, the activities of which, if carried on a by an associated company of the new company, would form part of an existing trade carried on by that associated company.

The changes introduced in the Finance Act 2011 apply to all qualifying companies for accounting periods beginning on or after 1 January 2011. However, companies which set up and commenced a qualifying trade in 2009 or in 2010 will be able to obtain relief on the previous (i.e. pre-Finance Act 2011) basis for profits earned in accounting periods commencing before 2011.

Finance Act 2012 changes

Section 45 of the Finance Act 2012 provides for the extension of the tax relief to start-up companies to those companies which commence a new trade in 2012, 2013 or 2014.

Finance Act 2013 changes

Section 34 of the Finance Act 2013 provides for the enhancement of the tax relief to start-up companies by allowing any unused relief arising in the first 3 years of trading, due to losses or insufficient profits, to be carried forward for use in subsequent years. The amount of relief is restricted by reference to the total employers’ PRSI contributions for each year in respect of the company’s employees (subject to an overall limit of €40,000 in any one year). The changes made by section 34 of Finance Act 2013 have effect in relation to any ‘first relevant amount’ or ‘second relevant amount’ (see Paragraphs (4A)(b)(i) & (4A)(b)(ii) below) for accounting periods ending on or after 1 January 2013.

Finance Act 2014 changes

Section 39 of the Finance Act 2014 provides for the extension of the tax relief for start-up companies to those companies which commence a new trade in 2015.

Finance Act 2015 changes

Section 29 of the Finance Act 2015 provides for the extension of the tax relief for start-up companies to those companies which commence a new trade in 2016, 2017 or 2018.

Finance Act 2018 Changes

Section 21 of the Finance Act 2018 provides for the extension of the tax relief for startup companies to those companies which commence a new trade in 2019, 2020 or 2021.

(1)(a) Subsection (1) contains the definitions used in the section, as follows:

“associated company” is construed in accordance with section 432;

“Commission Regulation (EC) No. 1998/2006” refers to The Commission Regulation (EC) No. 1998/2006 of 15 December 2006 on the application of Articles 86 and 87 of the Treaty to de minimis aid;

“EEA Agreement” is the agreement signed at Oporto on 2 May 1992, as adjusted by the Protocol signed at Brussels at 17 March 1993 between the EU and Norway, Iceland and Liechtenstein;

“EEA state” is a state which is a signatory to the above agreement;

“Employer Job (PRSI) Incentive Scheme” is the scheme provided for in the Social Welfare (Employers’ Pay-Related Social Insurance Exemption Scheme) Regulations 2010 (S.I. No. 294 of 2010);

“Employers’ Pay-Related Social Insurance” is what is generally known as Employers’ PRSI;

“excepted trade” has the meaning assigned to it by section 21A. It means a trade which consists of dealing in or developing land, excluding construction operations, working minerals and petroleum activities;

“net chargeable gains” means chargeable gains less allowable losses;

“new company” is a company incorporated in the State or in a EEA state on or after 14 October 2008;

“qualifying assets” are the assets of the qualifying trade which are disposed of in the first three years but not including assets transferred from another group company or assets acquired in the course of a reconstruction or amalgamation;

“qualifying trade” is a trade which is set up and commenced by a new company in the period beginning on 1 January 2009 and ending on 31 December 2021 but does not include a trade which was previously carried on by another person or formed part of another person’s trade, a trade of dealing or developing land or exploration and extraction of natural resources, a trade consisting of “service company” activities, a trade, the activities of which form part of an undertaking which is referred to in Article 1 of Commission Regulation (EC) No. 1998/2006, or a trade, the activities of which, if carried on by an associated company of the new company, would form part of a trade carried on by that associated company;

“relevant asset” is an asset which is, or an interest in, an asset used for the purposes of the trade other than an asset on the disposal of which no gain accruing would be a chargeable gain or an asset the consideration for the acquisition of which is determined by section 617 or section 631;

“relevant corporation tax” is the corporation tax which would be chargeable for the accounting period before any deduction from that tax under-

• this section,
• sections 239, 241, 440, 441, 644B and 827,
• paragraph 18 of Schedule 32.

The resulting corporation tax is subject to a further two exclusions, namely-

• the exclusion of the corporation tax chargeable on the part of the company’s profits attributable to chargeable gains for that period, and
• the exclusion of the corporation tax on the part of the companies profits which are chargeable to higher rate of corporation tax as specified in section 21A;

“relevant limit” means, subject to subsection (6), €5,000,

“relevant period” is the period of three years from the date of set up of the qualifying trade;

“specified contribution” is the lesser of the Employers’ PRSI paid in the accounting period [or which would have been paid if the Employer Job (Incentive Scheme) did not apply] and the relevant limit;

“total contribution” is the lesser of the aggregate of the company’s specified contributions for the accounting period and the lower relevant maximum amount specified in subsection (5);

“total corporation tax” is the corporation tax which would be chargeable for the accounting period before any deduction from that tax under this section, section 239 and section 241;

“trade” means a trade the profits or gains of which are charged to tax under Case I of Schedule D;

(1)(b) The part of a company’s profits attributable to chargeable gains for an accounting period is taken to be the amount of its profits for the accounting period exclusive of any income after any deduction for charges on income, expenses of management, or other amounts which can be deducted from or set against or treated as reducing profits of more than one description (such other amounts would include section 396(2) losses, excess “Case V” capital allowances (section 308(4)), and group relief (section 420)).

(1)(c) In computing a specified contribution for an accounting period of a company which sets up and commences a qualifying trade in 2011, an amount of Employers’ PRSI paid [or which would have been paid if the Employer Job (Incentive Scheme) did not apply] within one month after the end of the accounting period may be treated as Employers’ PRSI paid in the accounting period. Where such an amount is so treated it may not be taken into account into computing a specified contribution for any subsequent accounting period.

Qualifying trade

(2)(a) A “qualifying trade” is a trade which is set up and commenced by a new company at any time in the period beginning on 1/1/09 and ending on 31/12/21 but does not include a trade which was previously carried on by another person or formed part of another person’s trade, a trade of dealing or developing land or exploration and extraction of natural resources, a trade consisting of “service company” activities, a trade the activities of which form part of an undertaking which is referred to in Article 1 of Commission Regulation (EC) No. 1998/2006, or a trade, the activities of which, if carried on by an associated company of the new company, would form part of a trade carried on by that associated company;

Deemed separate trades

(2)(b) Where a trade consists partly of excepted operations and partly of other activities, each trade is treated as a separate trade for the purposes of the section, and a just and reasonable apportionment of receipts and expenses is to be made between the two parts.

(3) Where the accounting period for which relief is due falls partly within the relevant period then the period falling within the relevant period is treated as a separate accounting period and relief is granted for that period accordingly.

Exemption from tax

(4)(a) The aggregate corporation tax payable by the company, in so far as it relates to income from a qualifying trade or chargeable gains on the disposal of assets in relation to that trade in the accounting period, shall be reduced by the lower of the total contribution as defined in subsection (1) [i.e. Employers’ PRSI paid in the accounting period] or the corporation tax payable, as calculated above, for the accounting period.

Marginal relief

(4)(b) Where the total corporation tax payable by the company falls between the upper and lower maximum amounts then marginal relief is provided by the formula which graduates the relief evenly over the interval. The aggregate amount of corporation tax referable to income and gains of the qualifying trade will be reduced to an amount as calculated in accordance with the original marginal relief formula or, if greater, to that aggregate as reduced by the amount of qualifying Employers’ PRSI.

(4)(c) The corporation tax relating to income from the qualifying trade is the same proportion of the corporation tax on all trading income as the income of the qualifying trade is of all trading income.

Carry forward of unused relief

(4A)(a) Paragraph (a) defines, for the purposes of subsection (4A), corporation tax referable to the qualifying trade for an accounting period, which is the corporation tax referable to the income of the trade for the accounting period and chargeable gains on the disposal of assets used for the trade in the period. It also defines “an accounting period following the relevant period” as an accounting period commencing after the expiry of the initial 3 year period of the qualifying trade.

(4A)(b)(i) Where for an accounting period falling within the relevant period (i.e. the initial 3 year period of the qualifying trade) the company’s total corporation tax payable for the accounting period is less than €40,000 and the total (employer PRSI) contribution exceed the corporation tax referable to the qualifying trade for the accounting period, then the excess amount (referred to as a ‘first relevant amount’) is available to reduce the corporation tax referable to the qualifying trade for an accounting period following the relevant period.

(4A)(b)(ii) Paragraph (b) relates to companies that are eligible for marginal relief in an accounting period falling within the relevant period. Where the company’s total corporation tax payable for the accounting period is between €40,000 and €60,000 and the total contribution exceeds the corporation tax referable to the qualifying trade for the accounting period, an amount (referred to as a ‘second relevant amount’), calculated in accordance with the formula set out in Paragraph (b)(ii), is available to reduce the corporation tax referable to the qualifying trade for an accounting period following the relevant period. The amount determined by the formula is equivalent to the additional amount of marginal relief that would have been available to the company if the corporation tax referable to the trade were of the same amount as the total (employer PRSI) contribution.

(4A)(c) The aggregate of all first relevant amounts and second relevant amounts, if any, for accounting periods falling within the relevant period is to be referred to as a ‘specified aggregate’. This essentially provides for all amounts of unused relief in the relevant (i.e. 3 year) period to be aggregated together so that this aggregate amount can then be used to reduce corporation tax referable to the qualifying trade in accounting periods following the 3 year period, in accordance with Paragraphs (d), (e) and (f).

(4A)(d)(i) Paragraph (d)(i) is subject to paragraphs (e) and (f) and provides that, where a company carries on a qualifying trade for an accounting period following the relevant period, the corporation tax referable to the qualifying trade for that accounting period is to be reduced by the specified aggregate, as defined above. By making this subject to Paragraph (e), the amount of any reduction in the corporation tax referable to the trade shall not exceed the total (employer PRSI) contribution of the company for the accounting period.

(4A)(d)(ii) Paragraph (d)((ii) provides for a carry over of any excess, i.e. unused, amount of relief to later accounting periods until the specified aggregate is fully used up. It provides that, where there is a reduction in corporation tax for an accounting period by virtue of subparagraph (i) above and the specified aggregate exceeds the amount of that reduction,

• the corporation tax referable to the qualifying trade for the next accounting period is to be reduced by the amount of that excess, and
• so much of that excess as is not applied to reduce that corporation tax is, in turn, to be applied by the company to reduce the corporation tax referable to the qualifying trade for the succeeding accounting period and so on for each subsequent accounting period.

(4A)(e) The amount by which corporation tax referable to the qualifying trade for an accounting period may be reduced for an accounting period following the relevant period may not exceed the lower of such corporation tax and the total contribution of the company for the accounting period (subject to the overall limit of €40,000 in any one year).

(4A)(f) A company may apply so much of a specified aggregate to reduce corporation tax under this subsection only once.

Chargeable gains

(4)(d) The corporation tax on chargeable gains from qualifying assets is the same proportion of the corporation tax on all disposals as the net gains on qualifying assets is of net gains on all assets disposed of in the accounting period.

Relevant maximum amounts

(5) & (6) The upper and lower relevant maximum amounts for accounting periods of 12 months are €40,000 and €60,000, respectively. For shorter accounting periods, these amounts as well as the relevant limit as defined in subsection (1), are proportionately reduced.

Road Transport

(7) The total amount of relief for companies engaged in road transport is restricted to €100,000.

Succeeding to a trade

(8) Where a company claiming relief takes over the activities of another trade, those activities will be treated as a separate trade.

Exclusion from relief calculation of tax charged to higher rate of corporation tax

(9) For the purposes of calculating relief under this section the “total income brought into charge to corporation tax” for the accounting period, calculated in accordance with section 4(4)(b), is reduced by so much of the profits of the company for the accounting period as is charged to the higher rate of corporation tax under section 21A.

Connected persons

(10) Relief under this section will cease where part of the trade is transferred to a connected person.

Returns

(11) A company is obliged to specify the amount of relief being claimed under this section in its tax return.

Disclosure

(12) This subsection allows the Revenue Commissioners to disclose the amount of relief granted to any company under this section to a public body or local authority where the information is required to ensure that the de minimis state aid ceilings are not exceeded and to assist with European Commission enquiries.

Relevant Date: Finance Act 2019