# 12.5% Corporation Tax - How useful for small companies?



## accsvalue (20 Apr 2015)

I understand how the 12.5% corporation tax rate is attractive to multinationals. However, is it really so useful to small owner-managed private companies? If a company makes a profit of €20,000 *after* director's (100% shareholder) salary €75,000 and maximum pension contribution, the profit will be taxed at 12.5% (€2,500). Isn't this dead money? Is the director better off receiving a bonus of €20,000 despite it being taxed at 52% and therefore leaving no company profits taxed at 12.5%? At least the net salary (€10,400) is his own rather than the company paying €2,500 in corporation tax. Is my logic flawed and am I missing something?


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## Brendan Burgess (20 Apr 2015)

No, your logic is spot on. 

If you leave profits in the company, they will be taxed twice. 

Brendan


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## T McGibney (20 Apr 2015)

Brendan Burgess said:


> No, your logic is spot on.
> 
> If you leave profits in the company, they will be taxed twice.
> 
> Brendan



In most cases they actually won't, Brendan.


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## Woodie (20 Apr 2015)

Why not T McGibney?  As I see it the logic presented by Brendan and the OP is exactly correct albeit in my opinion unfair level of taxation considering the risks many SME owner directors take to employ and keep their businesses running.


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## srase (20 Apr 2015)

There are some ways to get money out of company tax free over the long term.  This would include items such as lump sum termination payments and retirement relief.

If you need to take the full amount of money out of company every year these options are not available so are only suitable for longer term planning.


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## T McGibney (20 Apr 2015)

Woodie said:


> Why not T McGibney?  As I see it the logic presented by Brendan and the OP is exactly correct albeit in my opinion unfair level of taxation considering the risks many SME owner directors take to employ and keep their businesses running.



I don't particularly disagree with the earlier comments except I wouldn't see money in a company as "dead money" and the fact remains that for continuing businesses, salaries to directors are deducible for corporation tax purposes so double taxation isn't an issue.


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## Firefly (20 Apr 2015)

Brendan Burgess said:


> No, your logic is spot on.
> 
> If you leave profits in the company, they will be taxed twice.
> 
> Brendan


The profits could very well be taxed 3 times!

Section 441 Surcharge on undistributed income of service companies

"a surcharge of 15 per cent on 50 per cent of the company‘s undistributed professional and service income"


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## Woodie (22 Apr 2015)

srase said:


> There are some ways to get money out of company tax free over the long term.  This would include items such as lump sum termination payments and retirement relief.
> 
> If you need to take the full amount of money out of company every year these options are not available so are only suitable for longer term planning.


As far as I understood this relief only applies if you sell the business to some a totally unrelated person?   Is this not the case?


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## srase (22 Apr 2015)

Woodie said:


> As far as I understood this relief only applies if you sell the business to some a totally unrelated person?   Is this not the case?



Does not have to be a sale to an unconnected party.  The reliefs may be able to be claimed as part of a liquidation/wind up of company depending on circumstances.  It is an area you need professional advice on to ensure that you qualify for the reliefs available.


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## radharc (1 Aug 2015)

Brendan Burgess said:


> No, your logic is spot on.
> 
> If you leave profits in the company, they will be taxed twice.
> 
> Brendan



Misleading in this instance. You could leave the profits in the company, pay CT, pay yourself a larger salary next year and thus incur a loss thereby negating any CT paid the previous year.

As T McGibney said CT is pretty much moot in the case of a profitable, owner managed company.


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## Money Mags (10 Sep 2015)

Not doubting your points T McGibney or radharc I just don't understand them.

Surely if I leave money in my company account at the end of the year it will incur CT leaving a balance which when drawn as salary the next year has income tax.

How is paying CT and then a subsequent Tax not double?

Radharc I don't understand your scenario of paying CT then the next year running a loss?


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## T McGibney (10 Sep 2015)

Money Mags said:


> How is paying CT and then a subsequent Tax not double?



Because directors' salary & pension payments are allowable deductions against corporation tax.


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## Dan Murray (11 Sep 2015)

T McGibney said:


> Because directors' salary & pension payments are allowable deductions against corporation tax.



Hi T McGibney

Sorry for being a bit slow on the update but I'm struggling to follow the logic here - would you mind elaborating please?


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## T McGibney (11 Sep 2015)

Dan Murray said:


> Hi T McGibney
> 
> Sorry for being a bit slow on the update but I'm struggling to follow the logic here - would you mind elaborating please?



How do you want me to elaborate? What I said is basic fact. Directors' salary & pension payments are allowable deductions against corporation tax - so the company doesn't pay Corporation Tax on earnings and PAYE/PRSI on salaries paid out of those earnings.


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## Dan Murray (11 Sep 2015)

T McGibney said:


> How do you want me to elaborate? What I said is basic fact. Directors' salary & pension payments are allowable deductions against corporation tax - so the company doesn't pay Corporation Tax on earnings and PAYE/PRSI on salaries paid out of those earnings.



The point of the OP and others is that if one makes a profit in a given year and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). Do you agree with this?


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## Jon Snow (11 Sep 2015)

Dan Murray said:


> The point of the OP and others is that if one makes a profit in a given year and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). Do you agree with this?


 
That's too simplistic a view. I assume Tommy's point is that all you are changing is the timing of the tax, and he is correct.

To put figures on your example:
if one makes a profit in a given year (let's say 80k before any salary to yourself) and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1 - €10k). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). This is correct and fine,* HOWEVER...*


Whenever you pay yourself that 80k in salary, you will save yourself that 10k in CT, because it will always be a deductible expense in whatever year it is paid out.
If you draw the full 80k as salary in year 1 to avoid paying any CT, you will pay income tax at 52% on a good chunk of it.
If you have a less profitable year next year or whenever, you might only have 20k of profit, and might only be able to pay yourself a much reduced salary - if you had kept some of the 80k back from year 1, you could now pay it out as a salary in year 2 and only suffer 31% income tax on it, and possibly create a CT refund by setting the resultant loss in year 2 back against year 1...
It all boils down to what accountants would term a timing difference.


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## Dan Murray (12 Sep 2015)

Thanks Jon


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## T McGibney (14 Sep 2015)

Dan Murray said:


> The point of the OP and others is that if one makes a profit in a given year and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). Do you agree with this?



Of course. But it's only part of the picture.  When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.


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## Setanta12 (14 Sep 2015)

accsvalue said:


> I understand how the 12.5% corporation tax rate is attractive to multinationals. However, is it really so useful to small owner-managed private companies? If a company makes a profit of €20,000 *after* director's (100% shareholder) salary €75,000 and maximum pension contribution, the profit will be taxed at 12.5% (€2,500). Isn't this dead money? Is the director better off receiving a bonus of €20,000 despite it being taxed at 52% and therefore leaving no company profits taxed at 12.5%? At least the net salary (€10,400) is his own rather than the company paying €2,500 in corporation tax. Is my logic flawed and am I missing something?




Instead consider an example where company makes a profit of €20,000 in Year 1 (per its bank balance) before director's salary/pension/remuneration etc.  The company can either increase directors remuneration (by extension, reducing profits) by c€20,000 and obviate need to pay CT @12.5%.  Or else pay 12.5% on the profits of €20,000.  Assume also that the company breaks-even each following year with no remuneration to the directors.

In Year 2; the company is either 1) carrying forward cash of c€17,500 (after payment of CT) or 2) Nil-cash.  But the Director will have received either Nil in the first example or gross c€20,000 in the second example.   It is true that in Year 2 or 3 or 4 the company can pay a bonus and claim a deduction for same - but if we are talking cash, it can only pay a bonus of 17,500 and not 20,000.  The director will pay tax on the 17,500.  If the director 'owns' the company, ultimately he is at a loss.


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## T McGibney (14 Sep 2015)

Setanta12 said:


> Instead consider an example where company makes a profit of €20,000 in Year 1 (per its bank balance) before director's salary/pension/remuneration etc.  The company can either increase directors remuneration (by extension, reducing profits) by c€20,000 and obviate need to pay CT @12.5%.  Or else pay 12.5% on the profits of €20,000.  Assume also that the company breaks-even each following year with no remuneration to the directors.
> 
> In Year 2; the company is either 1) carrying forward cash of c€17,500 (after payment of CT) or 2) Nil-cash.  But the Director will have received either Nil in the first example or gross c€20,000 in the second example.   It is true that in Year 2 or 3 or 4 the company can pay a bonus and claim a deduction for same - but if we are talking cash, it can only pay a bonus of 17,500 and not 20,000.  The director will pay tax on the 17,500.  If the director 'owns' the company, ultimately he is at a loss.



The company saves Corporation Tax of 12.5% of the value paid out in salary.

The above assumes the company has no other money. Of course this is possible but how realistic is it? If the prior-year profit is entirely distributed as salary (eg financed by the net after-tax profit brought forward plus the anticipated Corporation Tax refund/credit) the Corporation Tax cost to the company is zero.


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## Setanta12 (14 Sep 2015)

T McGibney said:


> The company saves Corporation Tax of 12.5% of the value paid out in salary.
> 
> The above assumes the company has no other money. Of course this is possible but how realistic is it? If the prior-year profit is entirely distributed as salary (eg financed by the net after-tax profit brought forward plus the anticipated Corporation Tax refund/credit) the Corporation Tax cost to the company is zero.



All other things being equal - it is as realistic as is required to prove the point. Each year's profits should be considered on their own over the years.  The prior-year profit funded, in your example, by PAT plus CIT refund/credit .. .. .. hmmmm .. for argument's sake, to prove the point more clearly and again taking each year in isolation for ease of understanding; I would describe it as the draft-PBT showing a profit of EUR20,000 - but with final-PBT after director-bonus of EUR20,000, showing a Nil profit.


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## Firefly (26 Sep 2015)

T McGibney said:


> Of course. But it's only part of the picture.  When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.



Hi Tom,

How many years can you carry this forward for? Say I leave x funds in my co now and pay CT. Can I then pay myself a low salary in 10 years time and get a CT tax refund from the CT tax paid 10 years previously?


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## T McGibney (27 Sep 2015)

Firefly said:


> Hi Tom,
> 
> How many years can you carry this forward for? Say I leave x funds in my co now and pay CT. Can I then pay myself a low salary in 10 years time and get a CT tax refund from the CT tax paid 10 years previously?


Yes, it's pretty much indefinite. Beware though of your own work circumstances changing in the meantime!


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## Gordon Gekko (27 Sep 2015)

T McGibney said:


> When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.



It's not really an effective refund of that tax.

Say the profit is €100k. €12.5k of tax is paid, leaving €87.5k on the balance sheet. Unless the €100k is withdrawn as salary the following year creating a loss to be set back against the prior year's €100k profit, the original €12.5k is lost.

Otherwise it's just being offset against "other" profits.


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## Dan Murray (27 Sep 2015)

Gordon Gekko said:


> It's not really an effective refund of that tax.



It's not at all an effective refund of that tax!

I am baffled why T McGibney keeps saying it is!


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## Gordon Gekko (27 Sep 2015)

Dan Murray said:


> It's not at all an effective refund of that tax!
> 
> I am baffled why T McGibney keeps saying it is!



I agree - I was just trying to be diplomatic!


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## T McGibney (28 Sep 2015)

Gordon Gekko said:


> It's not really an effective refund of that tax.
> 
> Say the profit is €100k. €12.5k of tax is paid, leaving €87.5k on the balance sheet. Unless the €100k is withdrawn as salary the following year creating a loss to be set back against the prior year's €100k profit, the original €12.5k is lost.
> 
> Otherwise it's just being offset against "other" profits.



If the company makes no other profits subsequently, it can still generate a tax refund in the following year by paying the prior year retained earnings as salary. This is a very basic observation, I can't for the life of me see how it could be in any way controversial.


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## Setanta12 (28 Sep 2015)

But wouldn't that instead create a trading a loss in that year, which would have to be carried forward until profits were earned?  There is no cash-tax-refund in what you're suggesting?


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## T McGibney (28 Sep 2015)

No, it is possible to claim prior-year loss relief.

http://www.revenue.ie/en/tax/ct/losses.html


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## Setanta12 (28 Sep 2015)

You know, I did know that once upon a time.  My dotage is already setting-in.

But the point still essentially stands - if this payment is not made in the following period, but perhaps in the period after the next period, then you have suffered twice.


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## T McGibney (28 Sep 2015)

Setanta12 said:


> You know, I did know that once upon a time.  My dotage is already setting-in.
> 
> But the point still essentially stands - if this payment is not made in the following period, but perhaps in the period after the next period, then you have suffered twice.



Possibly but certainly not necessarily. Again I fail to see how this is in any way controversial and needs people to be "diplomatic" etc


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## Gordon Gekko (28 Sep 2015)

T McGibney said:


> Possibly but certainly not necessarily. Again I fail to see how this is in any way controversial and needs people to be "diplomatic" etc



But T McGibney, that isn't what you said. Your analysis regarding the tax position is fundamentally flawed.


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## Jon Snow (29 Sep 2015)

Gordon Gekko said:


> But T McGibney, that isn't what you said. Your analysis regarding the tax position is fundamentally flawed.



I'm with Tommy on this.

Unless you think the company is unlikely to trade in the future, at a level sufficient to pay yourself a salary (in which case now is the time to pull the plug!), then there is almost no downside to retaining profits in the company and paying the appropriate taxes now, and in a future year (when the company may be trading less profitably) pay the retained amount out as a salary, possibly subject in part to the standard rate of tax.

The end result being:
1. you still got the same CT deduction (albeit in different CT years) when you pay it out as salary,
2. You still end up drawing the same amount as gross salary (albeit potentially suffering less income tax on it, and certainly not more).

Taking single years in isolation is entirely the wrong way to look at this issue, it's about looking at a longer period of time and seeing who gets what and who pays what. As long as a proprietary director is drawing an amount sufficient to use up their personal tax credit they are at worst tax neutral.


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## Gordon Gekko (29 Sep 2015)

Sorry, but what you are both contending is incorrect. It defies basis logic. Take the following example:

Profit in 2015 = €100k
Salary in 2015 = Nil
Tax in 2015 = €12.5k
Retained cash = €87.5k

Other than in the circumstances already pointed out (i.e. where a loss can be carried back to 2015), the €12.5k of tax is lost. The company had €100k to pay out to the shareholder. Now it doesn't - It has €87.5k. That is the salient point. €12.5k in cash has been lost to Revenue. Your contention also ignores the opportunity cost of not being able to withdraw future profits tax efficiently because of the requirement to extract the legacy €87.5k. And (rather dangerously) it assumes future profitability. Put simply, it's erroneous advice.


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## T McGibney (29 Sep 2015)

Gordon Gekko said:


> Put simply, it's erroneous advice.



It's not erroneous advice. Not because it's necessarily incontestable or even perhaps correct, but because it's not advice.

What we are all discussing here is effectively a set of tips and observations in relation to tax planning. All are theoretical and depend to some degree or other on a range of unstated assumptions and variables - unlike the practical scenarios in which each of us dispense advice to known customers, on the basis of the known facts of their particular circumstances and priorities, and crucially where we can resolve unknowns by asking questions and seeking clarification from the customer.

That's why I'm still rather bemused as to why this discussion seems to have gotten a tad contentious. It ultimately doesn't matter as it's obvious some of us are interpreting the issue from different perspectives.


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## Dan Murray (29 Sep 2015)

T McGibney said:


> It's not erroneous advice. Not because it's necessarily incontestable or even perhaps correct, but because it's not advice......



Oh dear. But water the horse bring drink can you to the....


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## Firefly (30 Sep 2015)

Hi Tommy,

If I am understanding you correctly, a practical example of this would be where a one-man company director is going to retire in say 5 years time when he reaches 65. He retains some profits in the company and is charged 12.5%. He then retires on his 65th birthday but continues to draw down a salary up to 20k per year (which for those over 65 is exempt from income tax). This salary is paid out to him from the tax paid at the 12.5% rate previously, until he breaks even with Revenue. Would that be right?

If so, can you also get this relief / rebate on the Section 441 Surcharge on undistributed income of service companies, if that was also charged?

Thanks,
Firefly.


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