Finance Act 2013 Changes to the 3-Year Tax Relief for Start-up Companies

Summary of Finance Act Changes

Finance Act 2013 (Section 34) provides for a significant enhancement of the tax relief for start-up companies by allowing any relief not availed of in the first 3 years of trading, due to losses or insufficiency of profits, to be carried forward for use in subsequent years. This is subject to the amount of relief in any year not exceeding the employer’s PRSI contributions of the company, with relief for these contributions capped at €5,000 per employee and €40,000 in total for a year.

A 3-year tax relief for start-up companies commencing a new trade was introduced in 2009, and extended to end-2014, as a support to encourage new business development and employment creation. The relief, which is provided for under section 486C of the Taxes Consolidation Act 1997, is available where the total amount of corporation tax payable by the company for an accounting period falling within the 3-year start-up period does not exceed €40,000. Marginal relief is granted on a tapering basis where the total amount of corporation tax liability for the accounting period is between €40,000 and €60,000. To ensure that the measure is focused on job creation, the amount of tax relief is based on the employers’ PSRI contributions of the company in respect of its employees, subject to a limit of €5,000 per employee and an aggregate limit of €40,000 in any one period.

Prior to Finance Act 2013, the relief operated on a ‘use it or lose it’ basis. Relief was not available to a start-up company in any of the first 3 years of trading where a loss was incurred and relief was only partly available where the tax payable on profits from the new trade was not sufficient to enable the company to obtain full relief for its employer’s PRSI contributions. There was no provision for carry forward of unused amounts to later years.

Section 34 addresses this limitation by allowing a start-up company, with eligible employer PRSI contributions in excess of the corporation tax referable to the qualifying trade ^[1] for an accounting period within the 3-year start-up period, to carry forward the excess amount and use it to reduce corporation tax in respect of the trade in subsequent years. Provision is also made to enable a company entitled to marginal relief for an accounting period in the 3-year period to carry forward the additional amount of marginal relief that would have been available if the corporation tax in respect of the trade were of a sufficient amount to match the company’s employer PRSI contributions.

Calculation of unused relief to be carried forward

Calculation of the amount of unused relief to be carried forward from the 3-year start-up period will depend on whether the company is eligible to claim full relief or marginal relief in any of the accounting periods in the 3-year period. [The calculation of marginal relief is outlined in Appendix 2.]

In the case of a company eligible for full relief in an accounting period falling within the 3-year period ^[2], where the total employer PRSI contribution exceeds the corporation tax referable to the qualifying trade for the accounting period, the excess amount (referred to in the legislation as a “first relevant amount”) is carried forward and will be available to reduce corporation tax referable to the trade in accounting periods following the 3-year period. For example, in the case of a company with a total employer PRSI contribution of €20,000 and corporation tax referable to the trade of €10,000 for an accounting period within the 3-year period, the company will be entitled to reduce that corporation tax to nil and to carry forward the unrelieved PRSI contribution of €10,000 for offset against corporation tax referable to the trade in accounting periods following the 3-year period ^[3].

Use of carried forward relief in accounting periods following the 3-year period

Once the amount to be carried forward in respect of each accounting period within the 3-year period is determined ^[4], these are then aggregated and that aggregate (referred to in the legislation as a “specified aggregate”) is then applied to reduce the corporation tax referable to the qualifying trade for accounting periods following the 3-year start-up period. This is subject to the requirement that corporation tax shall not be reduced in any accounting period by more than the total employer PRSI contribution for the accounting period.

Any residual amount of the specified aggregate that is not used in an accounting period can be carried forward and applied to reduce corporation tax referable to the trade in subsequent accounting periods until such time as the specified aggregate is fully used up. Thus, in the accounting period immediately following the 3-year start-up period, where the specified aggregate exceeds the amount by which corporation tax referable to the trade is reduced for that accounting period, the excess is carried forward and applied to reduce corporation tax referable to the trade for the next accounting period. Similarly, where it is not possible to fully use the excess in that accounting period, the remaining excess is, in turn, be applied to reduce the corporation tax referable to the trade for the succeeding accounting period and so on for each succeeding accounting period until there is no excess left.

An example of how the carry-forward provisions operate is provided in Appendix 1.

Commencement of new provisions

The Finance Act provisions will apply in respect of unrelieved amounts arising in accounting periods ending on or after 1 January 2013. This means that a company with an unrelieved amount of employer’s PRSI in an accounting period (within the 3-year start-up period) ending in 2013 will be able to carry forward that amount and use it to reduce corporation tax referable to the qualifying trade in accounting periods following the 3-year period.

Accounting periods falling partly within the 3-year start-up period

Section 34 of the Finance Act 2013 also clarifies how the relief applies where part of an accounting period falls within the 3-year start-up period. Where a company carries on a qualifying trade in an accounting period falling partly within the 3-year period, that part of the accounting period is to be treated as a separate accounting period for the purposes of the relief. For example, where the 3-year period expires at the end of 2013 and the company’s accounting period runs from 1 July 2013 to 30 June 2014, the six month period from 1 July – 31 December 2013 is treated as a separate accounting period and the corporation tax referable to income from the qualifying trade for this period, as well as the relevant employer PRSI limits, are determined by apportionment on a time basis.