Key Post How does Entrepreneur Relief work for contractors?

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StephenJ

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I've carried out quite a bit of research into entrepreneur relief and I think it's a viable medium term option. My understanding is I'd incur:
(a) 12.5% corporation tax when retaining profits in the company
(b) Professional services surcharge of 15% on 50% of my undistributed income (as I have a closed company) of 0.15*0.5*(1-.125) =6.56%. The 12.5% reduction is due to the surcharge being levied on post-tax profits.
(c) So I incur 19% tax when retaining in the company i.e. I'm left with 81% of my original cash.
(d) When I liquidate the company (after 3 years) I'm charged 10% CGT i.e.81%*90% = 72.9% (or 72.84% is the exact calculation)

So I've effectively paid a 28% tax on profits instead of withdrawing them at a 52% effective tax rate. I know I'll have to pay liquidator fees of €3k-€5k + VAT but am I missing anything else?

(I have been contributing heavily to my pension but I'd like to take cash in hand to repay my mortgage. I'm also concerned that the minimum age you can withdraw an executive pension will be raised from 50 to 60+by the time I retire, I'm now 35. The UK's min age will increase from 55 to 57 by 2028 and we'll follow suit I'm sure.)
 
Id be intetested to see if the above is correct, and peoples experience, and the surcharge of
Professional services surcharge of 15% on 50% of my undistributed income (as I have a closed company) of 0.15*0.5*(1-.125) =6.56%.
Does that matter what type of company it is, i.e consulting, and then is there a lifetime restriction on the max relief on the CGT and is there a chance this could be closed off by Govts in the future, is it a risk?
 
cloughy said:
Id be intetested to see if the above is correct, and peoples experience, and the surcharge of
Professional services surcharge of 15% on 50% of my undistributed income (as I have a closed company) of 0.15*0.5*(1-.125) =6.56%.
Does that matter what type of company it is, i.e consulting, and then is there a lifetime restriction on the max relief on the CGT and is there a chance this could be closed off by Govts in the future, is it a risk?
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"Does it matter what type of company it is"? A: Yes - the revenue make it clear which type of service companies / consultancy companies the surcharge applies to and specifically list some. See https://www.revenue.ie/en/tax-profe...ains-tax-corporation-tax/part-13/13-02-06.pdf

"Is there a lifetime restriction on the max relief on the CGT" --> The max CGT relief from the Revised Entrepreneur Relief scheme is €1m (lifetime limit i.e. could liquidate several different companies in your lifetime)

"Is there a chance this could be closed off by Govts in the future, is it a risk?" A: Yes. And it would be announced in the budget and effective that night. However, I'm also advised that in the UK the limit is €10m and my accountant firm (very large Dublin firm) believe it likely the Irish lifetime relief limit will be increased instead of the relief being abolished. I did the calculations though and you'd still come out better than paying 52% tax. So instead of 10% CGT, you'd be charged 33% resulting in a 45.77% effective tax rate.
(1-(1-(0.125+0.875*0.50*.15))*(1-0.33)) = .4577

[This looks tricky, but it's just a concise version of the formula in my previous post except a factor of 0.33 is used instead of 0.1 i.e. (1-(1-(0.125+0.875*0.5*0.15))*(1-0.1))=.271563]

Disclaimer: I'm not an accountant or financial adviser, but there are several on this forum. Let me know if any of my comments are not complete/accurate please.
 
The UK limit is no longer £10m, it’s €1m.

And, to be blunt, back when the UK limit was £10m I asked Pascal Donohue about the prospect of the Irish limit being increased and his response was that “entrepreneurs are doing fine”.

On that basis, I’d say the relief is more likely to be abolished than it is to be increased.
 
Gordon Gekko said:
The UK limit is no longer £10m, it’s €1m.

And, to be blunt, back when the UK limit was £10m I asked Pascal Donohue about the prospect of the Irish limit being increased and his response was that “entrepreneurs are doing fine”.

On that basis, I’d say the relief is more likely to be abolished than it is to be increased.
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Ok, I can see it was announced the limit was reduced from £10m to £1m in the UK's 2020 budget effective last March. Thanks for the info Gordon.

Still seems worth it to me, as I save on the 52% (45.77 % calc above) even in the unfortunate event it's abolished. And we might just get a heads up, if the UK abolish it in their March budget then we know it's very likely to be abolished come November.
 
I have put the information from Steve's post into a table. Have I got it right?

5151
 
One thing that concerns me is the restriction:

  • Relief does not apply to any assets held as investment.
Surely the €73k retained in a bank account is an investment?

Brendan
 
If it works, why would a contractor not set up a limited company and liquidate it after three years and then set up another one.

Ok, I have the answer to that here:

Entrepreneur Relief Contractor | Icon Accounting - Accountancy Services for Contractors

How can I use it to reduce my Effective Rate of Tax? In this blog, we will go through all you need to know about Entrepreneur Relief & how to avail of it including frequently asked questions and an example scenario.
www.iconaccounting.ie www.iconaccounting.ie

Can i close down my company and continue contracting?

No, it must be shown the trade of the company has genuinely ceased otherwise Revenue may challenge the bona-fida of the claim



Brendan
 
Brendan Burgess said:
One thing that concerns me is the restriction:

  • Relief does not apply to any assets held as investment.
Surely the €73k retained in a bank account is an investment?

Brendan
Click to expand...
My accountant's view was that the Revenue are trying to exclude investment companies i.e. those whose primary source of income was from investments. They thought that if I invested any funds retained in the company (in a brokerage for example) but sold them before the liquidation event that it would not contravene the rules, and technically the relief is self-assessed.
 
Lads has anyone gone ahead with this scheme or even better come out the other side ?


Good, bad experierences ?
 
From revenue website

Revised Entrepreneur Relief
Note

This relief replaced the Entrepreneur Relief that applied for the years 2014 and 2015.

This relief gives a CGT rate of 10% on gains from the disposal of qualifying business assets. This is reduced from the normal rate of 33%. The rate is 20% for disposals from 1 January to 31 December 2016.

There is a lifetime limit of €1 million on the gains that you can claim relief on. Only gains on disposals made on or after 1 January 2016 are counted in the limit.
The relief does not apply to disposals of:

  • shares (other than shares that qualify for relief under this section), securities or other assets held as investments
  • development land
  • assets on the disposal of which no chargeable gain would arise
  • assets personally owned outside a company, even where such assets are used by the company
  • goodwill which is disposed of to a connected company
  • shares or securities in a company where the individual remains connected with the company following the disposal.
I would think that if your assets are cash/investments then probably excluded, but if your Accountant put it in writing then it's a viable option. I did look at this briefly for my LTD Co but with only cash as assets decided to pump into Exec pension and have no taxable profits.
 
cloughy said:
... if your Accountant put it in writing then it's a viable option....
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Kinda puzzled by this statement. No piece of paper is going to automatically confer a tax relief that otherwise mightn't be available. Always treat optimistic advice with extreme suspicion.
 
It was more tongue in cheek, as I'd doubt they would put it in writing, as my reading was cash and investments wouldn't be included, but really tax advice should be received whether from an accountant or advisor so if revenue challenge and win you have someone to go after.
I'm not a tax expert, so they would be better placed to confirm if the proposal would work.
 
Slightly off topic but what is the logic in professional services attracting a surcharge?

It also seems an unusual approach to define a profession to pay more? Usually people are isolated for reduced rates/suppoorts, and people doing well are managed under progressive income tax?
 
presidenttttt said:
Slightly off topic but what is the logic in professional services attracting a surcharge?

It also seems an unusual approach to define a profession to pay more? Usually people are isolated for reduced rates/suppoorts, and people doing well are managed under progressive income tax?
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To stop doctors and similar professions incorporating to manage their tax outside of PAYE, thus reducing their tax payment.
 
Surely that should be managed as a progressive sort of tax then not picking out random professions with a wide earnings spectrum. I know a profession isn't a protected characteristic but nevertheless...
 
presidenttttt said:
Surely that should be managed as a progressive sort of tax then not picking out random professions with a wide earnings spectrum. I know a profession isn't a protected characteristic but nevertheless...
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Progressive tax is hard to manage for individuals who don't put their income through PAYE. The surcharge specifically taxes profits from being retained in companies from year to year for the purpose of reducing tax payments.
 
time to plan said:
Progressive tax is hard to manage for individuals who don't put their income through PAYE. The surcharge specifically taxes profits from being retained in companies from year to year for the purpose of reducing tax payments.
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The irony is that an incorporated property developer can make millions in developing a site and will pay 12.5% on profits without any surcharge. An incorporated builder who builds on the site can likewise make millions on the project and likewise pay 12.5% without any surcharge. Meanwhile any incorporated engineers, accountants and solicitors who variously provide services to the development and construction projects will make only a tiny fraction of the above sums yet will be stiffed with a surcharge.

It's ridiculous discrimination.
 
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time to plan said:
The surcharge specifically taxes profits from being retained in companies from year to year for the purpose of reducing tax payments.
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It doesn't even do that. The surcharge is payable only when the profits are earned. Those profits can sit in the company forever without further surcharge.
 
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