# Taking Low Salary + Expenses from New Ltd Company



## MsGinger (15 Jan 2008)

I am posting this question for a friend who has recently set up his own business.

Is there any reason why a director of a company cannot take a low salary and claim genuine expenses such as mileage/subsistence etc?

He wants to take a low salary until he has built up the business, and to claim mileage and other subsistance allowances which would be wholly & necessarily incurred in the performance of duties related to the business, but his accountant has advised against him taking this route and has asked him to instead pay a higher salary.

By 'low salary' I mean a salary that would not extend into the 41% tax band.


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## boskonay (15 Jan 2008)

There's nothing wrong with a more modest salary, and then putting in mileage every month


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## Joe1234 (15 Jan 2008)

MsGinger said:


> his accountant has advised against him taking this route and has asked him to instead pay a higher salary.
> 
> By 'low salary' I mean a salary that would not extend into the 41% tax band.



What specific reasons did the accountant give for this advice?


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## MsGinger (15 Jan 2008)

Thanks for replies, I don't have any more info at the moment re: the accountant's reasons but I will try to find out and post back later.


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## ubiquitous (16 Jan 2008)

There is a risk that an unusually low directors salary, combined with high directors expense claims for motor & subsistence expenses, may draw the Revenue's attention to the case and significantly increase the chances of an audit. This risk depends to some extent on the nature of the business. Its impossible to judge whether the accountant's advice is appropriate on the basis of the limited information provided here.


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## mik_da_man (16 Jan 2008)

Well I am in a similar situation and I pay myself all allowable expenses and a adequate salary. Once the expenses do not far outweigh the salary than I think it should be ok.
My Accountant is happy with my approach, but she did warn that giving myself a really low salary would attract the revenue's attention.


Mik


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## ButtermilkJa (16 Jan 2008)

I was advised by my accountant to take a salary below the 41% threshold and I agree with him. As far as I'm concerned, if all the expenses I am claiming are legit business expenses then it's nobody's business but my own how much I pay myself. If I can live off €35,400 per year then I'll do it. Surely there's no law against it?

I understand it could draw attention from Revenue, but if you've nothing to hide then there's no problem.


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## Purple (16 Jan 2008)

ButtermilkJa said:


> I understand it could draw attention from Revenue, but if you've nothing to hide then there's no problem.


 That's very true. Just make sure you can proove you have nothing to hide.


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## ubiquitous (17 Jan 2008)

ButtermilkJa said:


> I was advised by my accountant to take a salary below the 41% threshold and I agree with him. As far as I'm concerned, if all the expenses I am claiming are legit business expenses then it's nobody's business but my own how much I pay myself. If I can live off €35,400 per year then I'll do it. Surely there's no law against it?
> 
> I understand it could draw attention from Revenue, but if you've nothing to hide then there's no problem.



A salary of €35,400 per year would not normally be regarded as unusually low in this context.


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## ButtermilkJa (17 Jan 2008)

ubiquitous said:


> A salary of €35,400 per year would not normally be regarded as unusually low in this context.


Fair enough. But, for example, if I was take a salary of €18k in order to avoid tax/prsi etc. and had legit expenses for €12k to get the same net result as a €35,400 salary, could this ever become an issue. Just curious?


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## ubiquitous (17 Jan 2008)

ButtermilkJa said:


> Fair enough. But, for example, if I was take a salary of €18k in order to avoid tax/prsi etc. and had legit expenses for €12k to get the same net result as a €35,400 salary, could this ever become an issue. Just curious?



Perhaps. An €18k salary isn't far off minimum wage.


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## MsGinger (18 Jan 2008)

I got a little more info.  Some of what I posted above was incorrect.  The company is a small one, turning over approx €150k a year.  It would be mostly a service company, however there would be some purchases, which would be billed to clients.

One director wants to take a salary of approx €35,000, then claim expenses for the 200 or so miles a week, which he will be required to do in the course of his work.

The other director wants to take a salary of approx €52,000 and not do anything with expenses.

The accountant has not advised either way, but my friend said that he was not helpful when he explained what he wanted to do.


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## Nige (18 Jan 2008)

Not taking expenses, where valid business mileage is incurred, would be mad.


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## boskonay (18 Jan 2008)

Agree with Nige.

Civil service rate for mileage is generally accepted and is around 70c a mile iirc. So 200 miles a week or 800 miles a month is about 560 euro per month in expenses.

The key thing is that expenses like this are 'tax free' and to pay yourself 560 euro net per month would cost you twice that.


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## boskonay (18 Jan 2008)

Assuming that, the 35k director would have a net income equivalent to a base salary of about 47k or so in real terms.


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## ubiquitous (18 Jan 2008)

MsGinger said:


> ... his accountant has advised against him taking this route and has asked him to instead pay a higher salary.





MsGinger said:


> The accountant has not advised either way,...



???


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## ButtermilkJa (18 Jan 2008)

MsGinger said:


> ...
> The other director wants to take a salary of approx €52,000 and not do anything with expenses.
> ...





boskonay said:


> Assuming that, the 35k director would have a net income equivalent to a base salary of about 47k or so in real terms.


So would it be correct to say that the 2nd director is costing the company money (at least in respect of Employers PRSI) by not making up his c.€50k salary by claiming expenses? Does this make sense?

EDIT: Assuming that both Director's have more or less equal mileage/expenses


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## Nige (19 Jan 2008)

If the director is a propriatory director there is no employers' prsi.


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## pbyrne (21 Jan 2008)

Hi,

One thing that's not clear here - would there be money 'left over' once the salaries and expenses were paid. If so I believe you cannot carry that forward from year to year without paying capital gains + service tax (can't remember the exact name at the moment). One of the accounting experts here could clarify that for you.


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## ubiquitous (21 Jan 2008)

pbyrne said:


> you cannot carry that forward from year to year without paying capital gains + service tax (can't remember the exact name at the moment).



Corporation Tax? At 12.5% of retained (ie leftover) profits, this is hardly likely to be a serious issue.


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## Nige (21 Jan 2008)

I think pByrne is also thinking of the close company surcharge. This only applies to companies that are earning non-trading income or are providing professional services.


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## pbyrne (21 Jan 2008)

Nige said:


> I think pByrne is also thinking of the close company surcharge. This only applies to companies that are earning non-trading income or are providing professional services.



Exactly Nige - _close company surcharge _is what I was thinking of. Isn't it something close to 20% of the retained profit after corporation tax.


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## mik_da_man (23 Jan 2008)

From the revenue:

*



Close Companies 

Most Irish resident companies are what are called 'close' companies.
A Close Company is a company that is controlled by five or fewer participators or is controlled by any number of participators who are directors.
The definition of a Close Company includes a company where, on distribution of its full income, more than 50% goes to five or fewer participators or participators who are directors.
A participator is a person having an interest in the income or capital of the company.
Close Company provisionsThe Close Company provisions set out in the Taxes Consolidation Act 1997 have four main implications for a company and its participators/directors.

Certain benefits-in-kind and expense payments to participators or associates will be treated as distributions.
Interest in excess of a specified rate paid to directors or their associates will be treated as distributions.
Loans to participators or their associates must be made under deduction of tax and, if the loan is forgiven, the grossed-up amount is treated as income in the hands of the recipient.
A surcharge of 20% is payable on the total undistributed investment and rental income of a close company. Close "service" companies are also liable to a surcharge of 15% on one-half of their undistributed trading income.


Click to expand...

 
Looks like an extra 20% to me??...
So in my case (IT Contractor) I'm better off getting all the money out of the business as Pension/bonus/Wages.. right??

Mik*


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## capall (24 Jan 2008)

Yes,you should be filing zero profits each year in your CT return


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## ubiquitous (24 Jan 2008)

capall said:


> Yes,you should be filing zero profits each year in your CT return



Frankly, I wouldn't go this far. There is no necessity to cut profits to zero every year. I would argue the doing so only complicates matters, for example in relation to the EGM needed under the 1986 Companies Acts if the company is insolvent.

The service company surcharge is not a problem if profits are extracted from the company within the specified period allowed. Once the company is not building up sizeable reserves, then there should be no problem.


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## Nige (24 Jan 2008)

I wouldn't presume that an IT Contractor is caught by the close company surcharge provisions. Talk to your accountant about what, exactly, your company does and take it from there.


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## mik_da_man (24 Jan 2008)

Nige said:


> I wouldn't presume that an IT Contractor is caught by the close company surcharge provisions. Talk to your accountant about what, exactly, your company does and take it from there.


 
From reading the revenue site it looks like I am, but I will check with my accountant

Mik


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## Nige (24 Jan 2008)

You are definitely a "close company". However, you will not be subject to a surcharge on your trading profits unless the company's business consists of carrying on a *profession* or the provision of professional services, or exercising an office or employment.

While the Revenue have tried to have IT services deemed to be "professional" services, this doesn't really tie in with the case law on this issue.


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## pbyrne (25 Jan 2008)

Nige said:


> You are definitely a "close company". However, you will not be subject to a surcharge on your trading profits unless the company's business consists of carrying on a *profession* or the provision of professional services, or exercising an office or employment.
> 
> While the Revenue have tried to have IT services deemed to be "professional" services, this doesn't really tie in with the case law on this issue.



Nige,

That is very interesting - my accountant is certainly of the view that we would be hit with that close company surcharge if we retained profits in the company. I am an IT Contractor also. (admittedly I have a few staff also so perhaps the definition changes then?)

Is there any way to get a definitive answer on this - how would it work in practice, you would not pay the surcharge and then if challenged by revenue you would engage a solicitor to argue the point on the case law you refer to?

Cheers,

pbyrne


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## ubiquitous (25 Jan 2008)

The precise nature of the services provided by the company should influence whether or not the surcharge applies. 

The number of staff employed by the contractor company shouldn't make any difference.

The best way to get a definitive opinion is through a specialist tax consultant, either via your accountant or directly.  Most solicitors would have zero experience of dealing with issues like this.


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## capall (25 Jan 2008)

ubiquitous said:


> Frankly, I wouldn't go this far. There is no necessity to cut profits to zero every year. I would argue the doing so only complicates matters, for example in relation to the EGM needed under the 1986 Companies Acts if the company is insolvent.
> 
> The service company surcharge is not a problem if profits are extracted from the company within the specified period allowed. Once the company is not building up sizeable reserves, then there should be no problem.



 If you don't clear the company profits down to zero then you pay corpo tax unnecessarily,if you are going to extract the money after the year end why incur this cost ? Having zero profits is not the same as being insolvent

Also I would not like to take on the revenue as regards IT consulting not being covered by the service company surcharge


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## pbyrne (26 Jan 2008)

capall said:


> If you don't clear the company profits down to zero then you pay corpo tax unnecessarily,if you are going to extract the money after the year end why incur this cost ? Having zero profits is not the same as being insolvent
> 
> Also I would not like to take on the revenue as regards IT consulting not being covered by the service company surcharge



Hi capall,

I think the theory in retaining the profits is that after , paying the corporation tax and the surcharge you can accumulate money in the company - which could then be distributed to shareholders (ie: you) upon liquidation.

I keep meaning to look at a worked example of this but it would go something like this:

(NB: I am in no way a tax specialist - just trying to remember how somebody explained it to me)

[broken link removed]

For scenarios like this people would need to consider though what they could be doing with the money if they drew it down each year (ie: paying their mortgage! - then from my calculations it works out better to take the salary as normal)

pbyrne


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