This is our second blog on 10 things you need to know when setting up a company. If you didn't get a chance to see the first one read here
An interesting webinar I saw recently was from the School of Family business in DCU. Professor James Davis spoke about 2 things that he saw as very important in the Covid-19 period. For businesses these were
- Strategic pivoting
The first point was to look at what type of business you have. Did your business have a strong purpose during the pandemic? If you think of a shop or a pharma company their purpose was significant. The shop provided the food essentials that you needed in lockdown. The pharma company is making the inhalers or ventilators that are vital to help people live. The second point looks at how did your business change during the pandemic and is still changing? How many pubs and restaurants offered a collection service? If you owned shares in airlines or Zoom you will have lost or gained money. Look at a local company like Azurri in Waterford. They started making PPE gear which was fantastic at a time of great need.
The key learning was that a business that has a strong purpose and can pivot or change will be durable and able to survive over the long term. Being able to change to the demands of your customers means you have to be adaptable. The type of structure in which you carry on your business also has to be adaptable and flexible. This is what a company is. The next 5 are:
Accessing Finance/ Loan repayments
We were looking to buy a business earlier this year and spoke to the bank about funding. One question that came up was if the loan application would be in the partnership or company name. In the company name was the preference for the bank. Why was that? The answer was that a company would have a greater capacity to repay the loan. The bank saw this as a safer bet. With the lower corporate tax rate, there would be more cash left in the company. With more available cash, the bank has a much better chance of getting their money back.
Let’s look at an example. Bud and Mary are husband and wife and don't have kids. Bud runs a successful pub and is a sole trader. His pub had profits of €100,000 in 2019. Mary is a nurse and her salary is €30,000 per annum. To meet all their bills, they need €5,000 per month. Their combined tax bill, to include USC & PRSI, in 2019 is €42,000. Personal bills and taxes come to €102,000. This leaves them with an excess of €28,000 to cover business loans. If we compare this to a company Bud Ltd. Bud has an annual salary of €45,000 and Mary's salary is €30,000. Their combined tax liability on this is €14,300 so net salary is €60,700. This gives them enough funds to meet their monthly outgoings. After taking a deduction for Bud's salary in Bud Ltd the taxable profit is €55,000. At 12.5% the corporation tax cost is €6,875. This cash left in the company is €48,125. There is over €20,000 more left in the company to meet the loan repayments.
Corporation Tax Deadlines
A company has to file a corporation tax [CT]return within 9 months after the end of its accounting period. For 31 December 2019 year ends, companies have to file their CT return on or before the 21st of September 2020. Remember the filing date is the 21st. Those companies have until the 23rd of September if they pay and file through ROS.
If a company files their CT return late then there is a 5% surcharge on the tax liability. If the return is more than 2 months late then the surcharge increases to 10%. The 2 months period runs from the 21st September in the above example and not the 23rd of September. There is a limit on the amount of the surcharge as follows:
- 5% of the tax due, up to a ceiling of €12,695 if filed within 2 months of the filing date
- 10% of the tax due, up to a ceiling of €63,495 if filed after 2 months of the filing date
Using the example of Bud Ltd which has a CT liability of €6,875. If Bud files the 2019 return on the 1st November 2020 the surcharge will be €344. If he files the return after the 21st of November 2020 then the surcharge will be €688 being 10% of the liability. For more info read here
Corporation Tax Losses
In a company, there is more flexibility around the use of losses. It is possible to use losses in the following ways:
- offset losses against profits in the current accounting period to include Capital Gains
- offset against profits in the previous accounting period of the same length
- carried forward against profits of the same trade in a future accounting period
For example, Bakers ltd has two trades, a production facility, and a retail shop. In the current accounting period, the company had losses in the production facility. The retail shop had profits. The figures were as follows;
Production Losses [€50,000]
Retail Profits €20,000
In the previous accounting period, Bakers Ltd had a profit of €15,000. The losses in Bakers Ltd will be offset against the retail profits so there is no corporation tax to pay. There is a balance of losses left of €30,000. Of this €15,000 can be set back to the previous accounting period to get a CT refund. The balance of losses of €15,000 can only be offset against the profits of the production facility in the future.
If a sole trader has losses in their business, they can either
- set the losses against their other income in the same period but not against Capital Gains
- carry forward to offset losses against profits of the same trade
There is no opportunity to carry losses back, except in the case of a loss claim when the business is ceasing. Also, it is not possible to set Income Tax losses against Capital Gains.
Oh no I hear you say! There is a preliminary tax payment for companies too. And you thought that was only for self-employed people! Not the case. Small companies have to pay preliminary tax by the 21st of the month in the month before their year-end date. So preliminary tax for a 31 December 2019 year end was due on the 21st November 2019. The amount the company pays is 100% of the previous year's liability. Small companies are those with a corporation tax liability of less than €200,000
Bud Ltd would have to pay preliminary tax for the year ended 31 December 2020 of €6,875 by the 21st November 2020. Let's assume that the company had profits of €80,000 in the year ended 31 December 2020 [ I know it's a big assumption]
|Year ended||31 December 2020||€80,000|
|Less||Preliminary Tax paid||€6,875|
|Balance Due||21 September 2021||€3,125|
|Preliminary Tax for 2021||21 November 2021||€10,000|
The Companies Registration Office [CRO] deals with all company filings. As a company you have to meet the requirements of company law. One of these is to file a set of abridged accounts with the CRO. Abridged accounts are the balance sheet of the company at the end of their accounting period. This information is available to the public so anyone who wants to will be able to see the figures. This could be banks, competitors, and even the nosey neighbour down the road.
The company must also file an Annual Return called a B1. The first B1 must go to the CRO within 6 months of the date of incorporation of the company. If the company was set-up [incorporated] on the 15th March 2019 then the first B1 was due on the 15th of September 2019. The next Annual Return Date [ARD] is the 15th September 2020 and the Abridged accounts must go with that B1. No accounts go with the first ARD date. If the B1 is not filed on time this can cause serious problems for the company as
- there are fines and penalties for late submission of returns
- it can lead to the loss of an audit exemption - most companies in Ireland don't need an audit
There are a few downsides to have to file these documents, but it is a legal rule to do so. For more information read here
Over these last two blogs we have looked at 10 things to know about companies in Ireland. In general, they are good but there are some negatives. There is more paperwork, cost and time involved but these pains are worth it for all the benefits. Flexibility, tax-efficiency, and structure for growth are some of the benefits. We will delve into these a little further in future blogs. If you have a strong business with growth in mind and improving profits, this is where you need to be, for you and your business.
Do you need help in this area? If so, call Deirdre and she will point you in the right direction. Or send us a mail click here