Going Professional

Oct 31, 2017

Sunday Business Post, 29 October 2017
An unusually tall colleague of mine uses out of date editions of the Taxes Acts to raise the height of his computer monitor.  The books could have been put to worse use.  The Taxes Consolidation Act runs to over 3000 pages, and that doesn’t include VAT or stamp duties or inheritance tax law.  Even with the ultra-thin paper that has to be used in books of that size so that you don’t need a forklift to bring them round, these books are seriously thick. 

There seems to be a preference among those who draft the law to add to rather than subtract from the volume of existing rules when new items get introduced each year in the Finance Bill.  It was said of James Joyce that he used do his editing mainly by adding to, rather than subtracting from, what he had already written.  Similarly when tax law changes, the change rarely involves a deletion yet the addition typically lacks the Joycean grace. 

What you must not do

Another reason for the ever-increasing girth of the Taxes Acts is the approach taken in the drafting of tax legislation.  It’s all about “thou shalt not”, rather than “thou shalt”.  In essence the Taxes Acts is an extended list of what taxpayers mustn’t do.  While a new tax relief is introduced in a single sentence by a finance minister on budget day, it can take multiple sections of tax law to give it effect.  The purpose of most of these new sections is to tell you why and when you can’t claim the Minister’s apparent largesse.

The law harbours particular negativity towards a “close” company – close in this sense meaning that the stakeholders are connected closely either by family or commercial links.  Considerable effort is devoted to ensuring that it is inefficient for an individual to run their business through a company, rather than as an individual trading in his or her own right.  There is an obvious reason for this – the State does not want to have profits taxed at 12.5%, the corporation tax rate, when they could be charged at the income tax rate of 40% plus whatever USC and PRSI might be due.  The taxman is also one step ahead of clever ways to winkle money in and out of these closely held companies.

Professional Services Companies

Even within these tough rules, some types of business receive even more attention.  Professional services companies – engineers, management consultancies, and the like suffer tax surcharges on whatever profits they earn if those profits aren’t paid across to owners or employees. 

Professional service companies are also disqualified from the few incentives which are left in the tax system for company investment.  A new company formed to manufacture widgets can avail of a three-year corporation tax holiday in its early years of existence.  An engineering company set up to design those widgets cannot.  The tax relief known as SURE - the Start Up Relief for Entrepreneurs - offers budding entrepreneurs a refund of their PAYE if they decide to establish a company of their own.  Unfortunately this only applies if their new venture is involved in manufacturing or trading.  The entrepreneur isn’t supported in this way if establishing a new professional services company.

What do you KEEP?

Last week’s Finance Bill provided the details of favourable tax terms to support employees in taking up options to buy shares in their employer – the KEEP system. This is without question a good idea.  It makes good commercial and economic sense for businesses to offer a piece of the action to their employees.  It promotes staff retention, and businesses with such schemes report improved productivity and morale. 

The problem addressed in the Finance Bill is that when an employer gives an employee practically anything, it’s an occasion for taxation.  Giving an employee shares creates a tax liability due immediately in cash (which the employee might not have).  In essence, the KEEP system ensures that when employees take up shares, any tax liability only becomes due when the benefit crystallises in hard cash as the shares are sold.  KEEP also uses capital gains tax rules rather than income tax rules, so there should be a lower effective rate of tax on the proceeds of the shares.

Ruled Out

Yet again however, professional services companies are ruled out of availing of this incentive.  It’s not easy to quantify the overall contribution of professional services to the economy but judging by the number of qualified professionals alone, the contribution is substantial.  Nevertheless, public policy continues to discriminate against the sector.

This country’s progressive tax system has much to recommend it, but we persist in unfair discrimination when tax rules are applied by reference to how taxpayers earn their money rather than by how much they earn.  The self-employed are not treated as well as employees; the services sector is not treated as well as the trading and manufacturing sector. 

This year’s Finance Bill will add to the volume of the tax law in this country and my colleague won’t have to buy a stand for his computer monitor any time soon.  Unfortunately the Bill also adds to the bias against the professions.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.