12.5% Corporation Tax - How useful for small companies?

T McGibney said:
The company saves Corporation Tax of 12.5% of the value paid out in salary.

The above assumes the company has no other money. Of course this is possible but how realistic is it? If the prior-year profit is entirely distributed as salary (eg financed by the net after-tax profit brought forward plus the anticipated Corporation Tax refund/credit) the Corporation Tax cost to the company is zero.
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All other things being equal - it is as realistic as is required to prove the point. Each year's profits should be considered on their own over the years. The prior-year profit funded, in your example, by PAT plus CIT refund/credit .. .. .. hmmmm .. for argument's sake, to prove the point more clearly and again taking each year in isolation for ease of understanding; I would describe it as the draft-PBT showing a profit of EUR20,000 - but with final-PBT after director-bonus of EUR20,000, showing a Nil profit.
 
T McGibney said:
Of course. But it's only part of the picture. When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.
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Hi Tom,

How many years can you carry this forward for? Say I leave x funds in my co now and pay CT. Can I then pay myself a low salary in 10 years time and get a CT tax refund from the CT tax paid 10 years previously?
 
Firefly said:
Hi Tom,

How many years can you carry this forward for? Say I leave x funds in my co now and pay CT. Can I then pay myself a low salary in 10 years time and get a CT tax refund from the CT tax paid 10 years previously?
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Yes, it's pretty much indefinite. Beware though of your own work circumstances changing in the meantime!
 
T McGibney said:
When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.
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It's not really an effective refund of that tax.

Say the profit is €100k. €12.5k of tax is paid, leaving €87.5k on the balance sheet. Unless the €100k is withdrawn as salary the following year creating a loss to be set back against the prior year's €100k profit, the original €12.5k is lost.

Otherwise it's just being offset against "other" profits.
 
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Gordon Gekko said:
It's not really an effective refund of that tax.

Say the profit is €100k. €12.5k of tax is paid, leaving €87.5k on the balance sheet. Unless the €100k is withdrawn as salary the following year creating a loss to be set back against the prior year's €100k profit, the original €12.5k is lost.

Otherwise it's just being offset against "other" profits.
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If the company makes no other profits subsequently, it can still generate a tax refund in the following year by paying the prior year retained earnings as salary. This is a very basic observation, I can't for the life of me see how it could be in any way controversial.
 
But wouldn't that instead create a trading a loss in that year, which would have to be carried forward until profits were earned? There is no cash-tax-refund in what you're suggesting?
 
You know, I did know that once upon a time. My dotage is already setting-in.

But the point still essentially stands - if this payment is not made in the following period, but perhaps in the period after the next period, then you have suffered twice.
 
Setanta12 said:
You know, I did know that once upon a time. My dotage is already setting-in.

But the point still essentially stands - if this payment is not made in the following period, but perhaps in the period after the next period, then you have suffered twice.
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Possibly but certainly not necessarily. Again I fail to see how this is in any way controversial and needs people to be "diplomatic" etc :cool:
 
T McGibney said:
Possibly but certainly not necessarily. Again I fail to see how this is in any way controversial and needs people to be "diplomatic" etc :cool:
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But T McGibney, that isn't what you said. Your analysis regarding the tax position is fundamentally flawed.
 
Gordon Gekko said:
But T McGibney, that isn't what you said. Your analysis regarding the tax position is fundamentally flawed.
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I'm with Tommy on this.

Unless you think the company is unlikely to trade in the future, at a level sufficient to pay yourself a salary (in which case now is the time to pull the plug!), then there is almost no downside to retaining profits in the company and paying the appropriate taxes now, and in a future year (when the company may be trading less profitably) pay the retained amount out as a salary, possibly subject in part to the standard rate of tax.

The end result being:
1. you still got the same CT deduction (albeit in different CT years) when you pay it out as salary,
2. You still end up drawing the same amount as gross salary (albeit potentially suffering less income tax on it, and certainly not more).

Taking single years in isolation is entirely the wrong way to look at this issue, it's about looking at a longer period of time and seeing who gets what and who pays what. As long as a proprietary director is drawing an amount sufficient to use up their personal tax credit they are at worst tax neutral.
 
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Sorry, but what you are both contending is incorrect. It defies basis logic. Take the following example:

Profit in 2015 = €100k
Salary in 2015 = Nil
Tax in 2015 = €12.5k
Retained cash = €87.5k

Other than in the circumstances already pointed out (i.e. where a loss can be carried back to 2015), the €12.5k of tax is lost. The company had €100k to pay out to the shareholder. Now it doesn't - It has €87.5k. That is the salient point. €12.5k in cash has been lost to Revenue. Your contention also ignores the opportunity cost of not being able to withdraw future profits tax efficiently because of the requirement to extract the legacy €87.5k. And (rather dangerously) it assumes future profitability. Put simply, it's erroneous advice.
 
Gordon Gekko said:
Put simply, it's erroneous advice.
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It's not erroneous advice. Not because it's necessarily incontestable or even perhaps correct, but because it's not advice.

What we are all discussing here is effectively a set of tips and observations in relation to tax planning. All are theoretical and depend to some degree or other on a range of unstated assumptions and variables - unlike the practical scenarios in which each of us dispense advice to known customers, on the basis of the known facts of their particular circumstances and priorities, and crucially where we can resolve unknowns by asking questions and seeking clarification from the customer.

That's why I'm still rather bemused as to why this discussion seems to have gotten a tad contentious. It ultimately doesn't matter as it's obvious some of us are interpreting the issue from different perspectives.
 
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T McGibney said:
It's not erroneous advice. Not because it's necessarily incontestable or even perhaps correct, but because it's not advice......
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Oh dear. But water the horse bring drink can you to the....
 
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Hi Tommy,

If I am understanding you correctly, a practical example of this would be where a one-man company director is going to retire in say 5 years time when he reaches 65. He retains some profits in the company and is charged 12.5%. He then retires on his 65th birthday but continues to draw down a salary up to 20k per year (which for those over 65 is exempt from income tax). This salary is paid out to him from the tax paid at the 12.5% rate previously, until he breaks even with Revenue. Would that be right?

If so, can you also get this relief / rebate on the Section 441 Surcharge on undistributed income of service companies, if that was also charged?

Thanks,
Firefly.
 
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