Business owners must consider the tax implications of key business decisions to avoid pitfalls and realise the full benefits, advises Kerri O’Connell
For many successful business owners, tax planning and wealth management will be inextricably linked, requiring a careful approach to future considerations at a relatively early stage in the development of their business.
According to Kerri O’Connell, Tax Adviser and Principal at Obvio Tax Services, not all owners are aware of the tax implications of the decisions they make as they build their business, however.
“The time for considering these issues is before significant value has built up in the business as problems can arise when there has been no consideration of the potential sale of some or all of the business, or the investment assets, or for the future reliance on tax reliefs on business transfer,” says O’Connell.
A Registered Trust and Estate Practitioner with the Society of Trust and Estate Practitioners Ireland, O’Connell has been advising SMEs in Ireland for over 25 years as both a Chartered Accountant and Chartered Tax Advisor.
She founded Obvio Tax Services in 2015 to advise business owners on tax matters at each phase of the business cycle from start-up through to expansion and sale or succession.
“What I’ve learned is that, for many owners, their focus understandably will be on getting their business onto a sound footing and then building it from there,” she says.
“When their business becomes valuable, however, problems can arise if they fail to focus on their personal finances. This issue can be particularly acute when the business is incorporated, the owner has no pension scheme or some of the business surpluses have been used for investments.”
It is crucial, therefore, that business owners consider their exit plans at a relatively early stage in the development of their business and avail of good tax advice.
“It is very important to get tax advice specific to your business when it is growing and making profits,” O’Connell says.
Access to retirement relief on Capital Gains Tax (CGT) could potentially exempt the transfer from CGT. Alternatively, CGT entrepreneur relief may apply: “this relief applies a 10 percent CGT rate on the first €1 million of gains with the usual 33 percent CGT rate applicable to any surpluses,” O’Connell explains.
Several conditions must be met in order for these CGT reliefs to apply, requiring advance planning.
“In a family succession situation, the beneficiaries, be they children or grandchildren, will look to rely on Capital Acquisitions Tax (CAT) business property relief or CAT agricultural relief,” O’Connell says.
“Again, many conditions must be met, but if either of these reliefs are available, they can potentially reduce the taxable value by 90 percent and so potentially reduce the effective CAT rate to 3.3 percent.”
Other exit options open to owners include selling their business, or passing ownership on to senior leaders in the business through an internal takeover.
“If you are selling your business, pre-sale restructuring may be required to separate different trades, or to separate business and investment assets. This restructuring will attract tax liabilities unless various restricting reliefs can be relied upon,” O’Connell says.
If your exit involves an internal takeover, meanwhile, pre-sale restructuring may be required to isolate the sale asset.
“You may also need to consider the potential impact of some anti-avoidance legislation, which can operate to turn a capital event – subject to CGT and potentially attracting CGT reliefs – into an income distribution, taxable to full income taxes, USC and PRSI,” O’Connell says.
Business structure
As businesses grow and expand into new markets, it is also important to consider tax implications from the point-of-view of business structure, O’Connell advises.
“Once the decision has been made to develop a new income stream or enter a new market, it is important to stop and think first about the right business structure going forward,” she says.
“Don’t put off thinking about structure until a year or two of trading to ‘see how it goes’ – you’re potentially storing up tax problems.
“If you have identified new income streams with different plans for each stream, a group structure may be appropriate in terms of the retention of different businesses, their future sale or the introduction of key employees as shareholders.”
Tax issues arising from the creation of a group structure can be managed if conditions are met for the relevant tax reliefs to apply, O’Connell says.
“You will also need to think about business structure if you are expanding into overseas markets and deciding whether to set up a separate company or overseas branch in a new country. Tax advice in that country will be required either way and you will also need to consider the tax implications of profit repatriation.
“Do bear in mind that, if you have sales staff operating in another country, this will likely create payroll tax issues in that country as well as potential exposure to corporation tax.”
As growth ramps up and business owners look to the next stage of their company’s development, it is a good idea to consider the tax-based financing options open to them – for example, the Employment Investment Incentive Scheme (EIIS) or repayable tax credits for research and development (R&D) activities.
Employment Investment Incentive Scheme
“Changes introduced in Finance Act 2019 resulted in the entire EIIS becoming self-assessed so there is no longer a requirement to secure advance approval from Revenue,” O’Connell says.
“In my view, this was a positive step as the timeframes for securing approval had become unworkable. Recent Finance Act 2023 changes will potentially continue this positive momentum, with the maximum investment on which an individual can claim income tax relief now increased to €500,000.”
A tiered system of relief has also been introduced depending on a company’s stage of development, as follows:
50 percent income tax relief for entirely new businesses;
35 percent tax relief for businesses operating for less than seven years;
20 percent tax relief for expansion/follow-on investment in businesses in operation for more than seven years.
“EIIS investors are used to the previous 40 percent rate of tax relief. In order to achieve more than a 35 percent rate now, they must invest in entirely new businesses,” O’Connell says.
“It remains to be seen if there will be increased EIIS funding available for younger riskier businesses and if this will change when an EIIS scheme might fit into the financing mix for a young business.”
R&D repayable tax credits
Changes to the R&D tax credit regime, introduced in recent years, mean that this credit may be wholly repayable to the recipient, making it a de facto source of finance for companies.
“Finance Act 2023 changes introduce an uplift in the rate of R&D tax credit from 25 percent to 30 percent,” O’Connell explains.
“For SMEs with claims of up to €100,000, the repayments continue to be made across three instalments, but more of the repayment can now be frontloaded with up to €50,000 repayable in the first instalment.”
Tax incentives: recent developments
Finance Act 2023 introduced changes to retirement relief on Capital Gains Tax (CGT), effective from 1 January 2025, writes Kerri O’Connell
The relief available on a transfer to anyone other than a child was previously subject to a cap of €750,000 total proceeds from qualifying assets, as long as the transfer took place after the owner turned 55 years of age and before they turned 66.
This later age restriction has been pushed out to 70. Any transfer made once the owner has turned 70 will be subject to a €500,000 cap.
For higher value businesses, the changes are negative as they introduce a maximum cap on retirement relief of €10 million total value of qualifying assets on any transfer to a child where the business owner is aged between 55 and 69. This cap is reduced to €3 million from age 70 onwards.
Previously, a claim for retirement relief on a transfer to a child before the age of 66 was unlimited as to the value of the qualifying assets transferred.
The reason for introducing different tax treatment depending on the age of the owner is to encourage the earlier transfer of businesses, but this policy aim may yet be defeated by the introduction of the new €10 million value cap.
Business lobby groups have come out firmly against the changes and understandably so, as the gift of a business to the next generation may now trigger significant tax charges, without any cash proceeds available to cover this.
While the 2022 Commission on Taxation and Welfare recommended such a cap, it did not set a proposed figure, and many would view the €10 million value as too low.
The Commission did, however, note that it should be ensured that the payment of tax on these gifts ‘does not undermine the viability of the enterprise’ and suggested the introduction of deferral arrangements or long payment schedules with low/no interest. These recommendations have not, to date, been taken up.
Another recommendation from the Commission is also worth highlighting. Typically, taxpayers will look to rely on CAT agricultural relief or CAT business property relief when receiving a gift of a farm or business.
The Commission recommended that these 90 percent reliefs be reduced and that the conditions attaching amended to ensure that the beneficiary actively participates in the farm/business they have been gifted. At the time of writing, however, this recommendation has not been taken up by the Department of Finance.
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