Company surplus conundrum

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sandyh2001in

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I am an IT contractor and have a limited company setup.

Close company regulations talk about 15 percent surcharge after paying 12.5 percent corporation tax on undistributed income. Are IT contracting limited companies Close companies?

I have about 75 K in the company account at end of year from my contracting income after payment of salary and expenses to myself. What should I do with this? If I take it as salary, I pay about 47 percent tax on it (41 percent paye +prsi+income levy). If I retain it in the company , I pay Corporation tax at 12.5 percent and a surcharge of 15% on half the retained profit, . Also if I decide to take the profit as salary after payment of corporation tax later , I end up paying <>

Intention is to keep the money in the company but not very sure if the euro is going to last for long , so just massively confused right now.

Another advantage of company retaining money could be that I could use it to keep paying me even for months in future when Im out of a contract.

What do you guys do?
 
I could use it to keep paying me even for months in future when Im out of a contract.
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This doesn't seem to be an argument at all. The company can pay it to you now and you can keep the net amount in an account in your name.

The only advantage in deferring it is if you were going to be out of contract for an entire tax year and so had no taxable income that year. Then the money could be used to pay yourself tax-free or at the 20% rate.

It seems to me that the best strategy is to pay yourself a salary, or accrue a salary sufficient to make sure that there is no taxable profit in the company.

Brendan
 
If I keep the money in the company and payout the 20 percent corporate tax, what happens next year? Whats my Corporate tax liabilty at end of next year?

If I make 100 K again in profit in 2012, how will the tax work?
Say I am left with 60 K as the carry forward profit into 2012 (after paying CT and surcharge). I guess I should pay CT on 2012's 100 K profit only? What do I pay the surcharge for 2012 on? Will that be paid on the entire amount in the company or just the current years profits?

Idea is to keep building the profits year on year and some day start a big business or something.
 
Corporation tax (and the close co surcharge) only apply to the profit for the relevant accounting period. So, if you make 100k next year then that's what will be taxed. If companies were taxed on the profits carried forward each year, not many people would form companies!
 
Then in that case, I see no problem whatsoever carrying on doing what Im doing!

I mean paying myself a decent salary month on month with expenses for my immediate needs (just so that I stay within the 20 percent tax bracket , married, single income and 28), paying 20 percent (instead of 47 percent ) on the extra contracting income (while the going is good) in the company account, building up a stash of money with an intention to use it for a bigger business, at the same time guarding against a future phase of unemployment where I could keep getting paid (upto a limit where I could stay just under the 20 percent bracket) ....

Lastly in the worst case, if after some years of doing this, I want to quit , I could simply liquidate at 25 percent on the entire company's worth and run with the rest.

How do you assess this plan Sirs?
 
Thanks for the replies so far, I am still chewing on this a bit more.

Could you please confirm if the below understanding is accurate:

Before the surcharge to kick in, there is a window of 18 months within which I can distribute the profit.

So if 100,000 was retained at end-2011, you pay 12500 as CT in Sep-12. You have 87500 in your company available upto June-2013 to distribute (without surcharge).

Now say I am working throughout 2012 and 2013 bringing in additional profits for those years, but still paying myself salary at below 20% level. Now I claim that the salary paid in 2012 and 2013 is from the profits made in 2011, thereby avoiding paying the surcharge (because Im distributing the profit afterall ). As far the unutilized profits for 2012 and 2013 are concerned, they are similarly paid out in subsequent years in the same way within 18 months at 20 percent avoiding surcharge.


You see the idea is to only pay 12.5 % CT and then a subsequent 20-22% PAYE/PRSI on all income in the company. (and no surcharge), this is way better than taking it out at end of year at 47%

Could someone please point out a problem in the above solution?

Many thanks
 
I query whether a salary payment is in fact a distribution, surely a salary charge is a P & L expense, simply reducing your taxable net profit?


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[broken link removed]
 
Well you're right to query, as a salary isn't a distribution! :)

But I think you've missed the salient point about the use of the salary. As you say, the salary is a P/L deduction, which reduces the profit, which reduces the P/L reserve, which in most small companies IS the distributable reserves. Therefore, if you pay out all of your profit as salary each year, you will never be liable to the surcharge...

However you will be stuck for the PAYE/PRSI, which is what was being debated above - is it better to have the cash profit out of the company where you can use it as you please for investment etc... or do you pay the surcharge, and hope that in the future there are still mechanisms to extract the value (including, hopefully, capital appreciation) from the company without getting murdered by tax...
 
mandelbrot said:
However you will be stuck for the PAYE/PRSI, which is what was being debated above - is it better to have the cash profit out of the company where you can use it as you please for investment etc... or do you pay the surcharge, and hope that in the future there are still mechanisms to extract the value (including, hopefully, capital appreciation) from the company without getting murdered by tax...
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Mandelbrot,
But do you need to pay the surcharge as long as you ensure you pay it out(careful not to use distribute) that profit within 18 months?

What is the counter against a claim that I may make that my salary in 2012 and 2013 is financed out of the profit of 2011, thereby avoiding imposition of surcharge?

Really Im asking that the 3 possibilities be considered:

1) Clean out the 100 K profit , realizing only 53 K but hell, the money is in your hand right away....
2) Let 100 K reduce to 87.5 K and then gradually take it out in a drip feed (below 20 percent band) so that you end up paying only approx 20 percent more on that figure as PAYE/PRSI, realizing about 70 K overall (way better than 53K!)
3) Worst case, you have to pay out the surcharge, 87.5 reduces to 81 K, you then have forever to draw down this profit (and if done in a drip feed of sub 20percent band, you still realize about 65 K overall (way better than 53 K still!)

And funds in the company could be invested even so that they increase in value (no matter what the CGT on those gains, it would still overall be a gain with the above approach)

Downside: Not a good option at all if retained money taken at the 41 percent tax band !

Any thoughts?
 
OK, I'm not sure if you have fully grasped the surcharge (and that's no disrespect to you - I know accountants who bamboozle themselves when they think about it!).

The point is that this surcharge is charged on the undistributed income of a service company, as at the accounting period end.

If your 2011 accounts show you have €100k of net profit at 31/12/2011, then you have 18 months to pay distributions, i.e. dividends (not salary) to the shareholders of the company (who may or may not be the salaried directors of the company).

In order to avoid the surcharge, and for ease of illustration I'm ignoring any investment/interest income, the company would have to vote & pay out a dividend, referable to 2011, equal to 50% of the income available for distribution at the year-end. In this case €50k. this is essentially a non-runner, because: You would never get a CT deduction for this €50k, whereas if you were to pay it as salary in a subsequent year you would get relief from CT at 12.5%. The amount of tax/PRSI etc would still be the same in either case.

If, as you mentioned above, you decide to pay additional salaries to yourself in the 2012 and 2013 tax years out of this 2011 surplus, these do not in any way affect the amount of distributable profit at the end of 2011, and therefore even though the money may be gone, the surcharge will still be owed, come 30 June 2013..! Such salaries will of course reduce the taxable profit (and the distributable income) in each of those years, but they would have no effect on the historical year 2011 or the surcharge arising on it.

You could, as was mentioned somewhere above (I think), accrue salary or "vote fees" for yourself as director in the 2011 period, and incur the PAYE/PRSI on 31/12/2011 at the prevailing rates. You could either take the net amount in cash, or leave it in the company, owed to you as a director's loan to the company available to be taken tax-free at a future time (when tax rates may well be higher).

There is no single right answer in these situations, as a lot depends on a person's preferences, lifestyle, aspirations etc... and tax isn't the only consideration.

Pensions are not my area of expertise at all, but the tax relief for executive pensions is very generous; depending on your age and if you are already drawing a decent salary the company could contribute a multiple of your salary to a pension fund - I think it may be possible to set up a self-administered fund - and such contributions are tax deductible for the company. This allows you to move the benefit of some of the profit from the company to yourself personally, albeit many years down the line! As I said, it depends on personal preference, are you willing to effectively put the money away for the long term in order to get a generous tax incentive, or would you rather have the use of (a percentage of) it in the immediate term...
 
mandelbrot said:
OK, I'm not sure if you have fully grasped the surcharge (and that's no disrespect to you - I know accountants who bamboozle themselves when they think about it!).

The point is that this surcharge is charged on the undistributed income of a service company, as at the accounting period end.

If your 2011 accounts show you have €100k of net profit at 31/12/2011, then you have 18 months to pay distributions, i.e. dividends (not salary) to the shareholders of the company (who may or may not be the salaried directors of the company).

In order to avoid the surcharge, and for ease of illustration I'm ignoring any investment/interest income, the company would have to vote & pay out a dividend, referable to 2011, equal to 50% of the income available for distribution at the year-end. In this case €50k. this is essentially a non-runner, because: You would never get a CT deduction for this €50k, whereas if you were to pay it as salary in a subsequent year you would get relief from CT at 12.5%. The amount of tax/PRSI etc would still be the same in either case.

If, as you mentioned above, you decide to pay additional salaries to yourself in the 2012 and 2013 tax years out of this 2011 surplus, these do not in any way affect the amount of distributable profit at the end of 2011, and therefore even though the money may be gone, the surcharge will still be owed, come 30 June 2013..! Such salaries will of course reduce the taxable profit (and the distributable income) in each of those years, but they would have no effect on the historical year 2011 or the surcharge arising on it.

You could, as was mentioned somewhere above (I think), accrue salary or "vote fees" for yourself as director in the 2011 period, and incur the PAYE/PRSI on 31/12/2011 at the prevailing rates. You could either take the net amount in cash, or leave it in the company, owed to you as a director's loan to the company available to be taken tax-free at a future time (when tax rates may well be higher).

There is no single right answer in these situations, as a lot depends on a person's preferences, lifestyle, aspirations etc... and tax isn't the only consideration.

Pensions are not my area of expertise at all, but the tax relief for executive pensions is very generous; depending on your age and if you are already drawing a decent salary the company could contribute a multiple of your salary to a pension fund - I think it may be possible to set up a self-administered fund - and such contributions are tax deductible for the company. This allows you to move the benefit of some of the profit from the company to yourself personally, albeit many years down the line! As I said, it depends on personal preference, are you willing to effectively put the money away for the long term in order to get a generous tax incentive, or would you rather have the use of (a percentage of) it in the immediate term...
Click to expand...


Thank you very much for taking out the time for a very useful response.
 
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