Corporation Tax Exemption for Start Up Companies

Peter Vale

By Peter Vale, ACA

So much has happened over the last year that it can be difficult to recall that there were two Finance Acts in 2008. The second Act, Finance (No. 2) Act 2008, introduced an exemption from corporation tax for start up companies, subject to certain limits and conditions.

The original exemption applied to companies commencing to trade in 2009. On 9 December 2009, the Minister for Finance announced that the exemption would be extended to companies commencing to trade in 2010. Further details will be included in the upcoming Finance Bill 2010.

Objectives

The exemption was originally introduced as a pro-business measure, designed to encourage new start up companies. It can broadly be seen as part of the package of tax incentives introduced to propel the new “smart economy”. Other existing measures include the R&D tax credit and the recently introduced relief for Intellectual Property.

Ministerial order pending

The relief was originally conditional on EU approval, since obtained, and also required a Ministerial Order, which was signed on 15 December 2009.

The benefits

So what tax benefits are available for start up companies under the new provisions?

Very broadly, new companies that have commenced to trade in 2009/2010 are exempt from corporation tax and capital gains tax until 2011/2012 provided that their tax liability in the year does not exceed €40,000. This represents the potential to shelter taxable profits of €320,000 per year or €960,000 over the three year period.

There is also a form of marginal relief where the tax liability in the year is between €40,000 and €60,000.

The relief applies to tax arising on trading profits, including capital gains tax arising on the disposal of assets used in the trade. The relief applies for three years from the date that the company commences to trade, so that it will expire in either 2011 or 2012 depending on when the company commenced trading.

When calculating the relief available the first step is to ensure the total corporation tax payable is under €40,000. It is important to note that total corporation tax includes corporation tax on investment income or close company surcharges, that is, tax that cannot be relieved under the new provisions.

Anti-avoidance provisions

If a trade previously carried on by the owner of the business is transferred into the company, this trade will not qualify for start up company relief. Only the portion of the corporation tax relating to the new trade will qualify for the relief.

A further anti avoidance provision to consider is where a company realises that the corporation tax liability for the year will exceed €40,000 and consequently transfers a portion of the trade to another company. The result of this situation is that neither the original company carrying on the trade nor the company the trade was transferred into will qualify for the relief under Section 486C TCA 1997.

Summary of main provisions

The relief can be found in section 486C TCA 1997 and the main provisions can be summarised as follows:

The company must be incorporated in the State or in an EEA State on or after the 14 October 2008;
The company must commence to trade between 1 January 2009 and 31 December 2010 (subject to confirmation in Finance Bill);
No tax is payable where the tax liability in the accounting period is below €40,000, with marginal relief applying where the tax liability is between €40,000 and €60,000 (limits reduced for short accounting periods);
The tax relief will apply for 3 years from the commencement of the new trade (so that it will expire in 2011/2012);
The trade must be new and must not have been carried on previously by another person or as part of another person's trade or profession in the State;
The relief is only available to companies;
The tax relief does not apply to companies that are dealing in land, petroleum or mineral activities;
The tax relief does not apply to income that is subject to tax at 25%;
The tax relief is not extended to development land gains liable to Capital Gains Tax;
The tax relief does not apply to professional service companies (so that doctors, architects, accountants etc cannot avail of the new relief);
The tax relief is restricted to a total of €100,000 over the 3 year period for companies operating in the road transport sector.
The amount of relief which the company is entitled to is not automatic and must be specified in the company's corporation tax return Form CT1.

Example 1
Tax Computation – Company X – owned by Mr Doyle
Case I	Trade A	€100,000
Case I	Trade B (previously owned by Mr Doyle)	€140,000
Case III	Deposit Interest	€30,000
Taxable Income		€270,000
€240,000 @ 12.5%		€30,000
€30,000 @ 25%		€7,500
Corporation Tax payable before Section 486C		€37,500
Section 486C relief
		€12,500
Revised Corporation Tax Payable		€25,000

Marginal relief is available were the total corporation tax payable is between €40,000 and €60,000 in a twelve month period. The marginal relief is calculated using the following formula to calculate the maximum tax payable on qualifying income:

Where:

T = total corporation tax payable by the company
M = lower limit i.e. €40,000
A = corporation tax payable on the qualifying trade
B = corporation tax payable on chargeable gains on the disposal of qualifying assets

Other reliefs

It is unclear at this stage what impact the relief will have on the availability of State Aid grants and incentives to start up companies such as the Business Expansion Scheme and Seed Capital schemes.

Summary

While the start up exemption is to be welcomed, its practical benefits may be limited. Many new companies incur losses in the early years of operation, meaning the new provisions may have little benefit. However, cashflow is more critical now than ever and the new regime will enable many new profitable companies to reinvest cash in the business that otherwise would have been diverted to Revenue.

Peter Vale, ACA, is Tax Director with Grant Thornton. Email: Peter.Vale@grantthornton.ie

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