Tax exemption for New Start-up Companies
1. Introduction
Tax Briefing Issue 06/10, issued in June 2010, highlighted the availability of relief from corporation tax for new start-up companies under the provisions of section 486C of the Taxes Consolidation Act 1997. The article set out details of the scheme of relief which applies for the first 3 years of trading and indicates the maximum and marginal tax-exempt amounts allowable, the time limits for the relief and the provisions relating to the de minimis grant aid requirements.
2. Changes introduced in Finance Act 2011
Section 34 of the Finance Act 2011 provides for the extension of the 3-year tax relief for start-up companies to those companies which commence a trade in 2011. It also modifies the existing relief so that the value of the relief will be 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 purpose of these changes is to better target the relief at start-up companies generating employment.
The Finance Act changes 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 gains [1] 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 gains [1] of the qualifying trade will be reduced to an amount as calculated in accordance with the 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. Some examples of how the modified relief is computed are given below.
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 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.
3. Examples
N.B. – In the examples below it is assumed that the corporation tax referable to income from the qualifying trade represents total corporation tax payable for the accounting period before relief under section 486C.
Example 1
Company A accounting period ending 31/12/11
Corporation Tax referable to income from qualifying trade: €20,000
| Employee Details | Employers’ PRSI paid in accounting period |
|---|---|
| Employee 1: | €2,000 |
| Employee 2: | €3,000 |
| Employee 3: | €6,000 [capped at €5,000] |
| Total Employers’ PRSI contribution: | €11,000 |
Qualifying Employers PRSI paid in accounting period: €10,000
Relief available under section 486C: €10,000
Example 2
Company B accounting period ending 31/12/11
Corporation Tax referable to income from qualifying trade: €20,000
| Employee Details | Employers’ PRSI paid in accounting period |
|---|---|
| Employee 1: | €4,000 |
| Employee 2: | €4,000 |
| Employee 3: | €5,000 |
| Employee 4: | €4,000 |
| Employee 5: | €4,000 |
| Employees [Job Incentive Scheme] | Amount Exempted |
| Employee 6: | €2,000 |
| Employee 7: | €2,000 |
| Total Employers’ PRSI contribution: | €25,000 |
Qualifying Employers PRSI paid in accounting period: €25,000
Relief available under section 486C: €20,000 [maximum relief available]
Example 3
Company C accounting period ending 31/12/11
Corporation Tax referable to income from qualifying trade: €50,000
| Employee Details | Employers’ PRSI paid in accounting period |
|---|---|
| As per Example 2: | As per Example 2 |
| Total Employers’ PRSI contribution: | €25,000 |
Qualifying Employers PRSI paid in accounting period: €25,000
Relief available under section 486C
Marginal relief applies – corporation tax payable reduced to greater of:
a) €50,000 less qualifying Employers’ PRSI paid and
b) amount per formula 3 * (€50,000 – €40,000)
Corporation tax payable reduced to (b) above i.e. €30,000
Relief available under section 486C: €20,000
4. Further Information
Whilst this article and Tax Briefing Issue 06 of 2010 set out broadly the details relating to section 486C relief, generally, it will be the facts of the case that will determine entitlement to relief under the scheme. Further information or requests for clarification should be addressed in the first instance to a company’s local tax office. More complex technical queries can be addressed through the Revenue Technical Service.
Guidelines on Revenue’s Service to Practitioners and Business Taxpayers are available at www.revenue.ie under the Tax Practitioners’ tab.
Footnotes
[1] i.e. chargeable gains on the disposal of assets of the qualifying trad