Tax refunds for PAYE employees who set up their own businesses

[dave29]

I've been working years in private sector and want to start my own business.

I read somewhere that you can claim back your last 6 years income tax paid to help start up.

Does anyone know if this is true? And if yes hope do you apply and what can these funds be used for
Thanks

 

[Monbretia]

Not an awful lot of info, maybe someone will know more.

[broken link removed]

Actually, here is the revenue manual which has more info

http://www.revenue.ie/en/tax-profes...ains-tax-corporation-tax/part-16/16-00-11.pdf

 

[newtothis]

Does anyone know if this is true? And if yes hope do you apply and what can these funds be used for

Yes, it's true and I've made use of it - it's easy enough to apply and not too long for approval. I can't remember the details about applying - it was a couple of years ago in my case, and it may have changed in the meantime.

The PDF file linked to above gives a good outline.

The funds can be used for any normal business expenditure, which can include paying yourself a salary. Note that any such payments (including benefits in kind) are subject to tax in the normal way.

The good news:

- it's possible to get funds back from Revenue to help fund a new business
- it's relatively easy to apply for and not too long to get

The bad news:

- there is a strict sequence of getting the refund: make investment, start trading then claim the refund. This sequence can be a catch-22 for many people as they need the refund to make the investment.
- the investment must go into the company as ordinary shares: when you want to draw the funds back out in the future, either as a salary or dividend or sale of the shares you pay tax on them. A more normal startup investment would go into a company as a director's loan, which can be paid back without being taxed.

In my case, I managed to make the sequencing work, and I just have to live with the 2nd point (I don't actually see much of an issue with paying tax on funds that were themselves a tax refund). The bottom line is without the refund I wouldn't have been able to start the business, at least at the scale I did. However, it's not always the case.

I'm not an accountant by the way, or a tax advisor: you should probably talk to one of these who has experience of the scheme to get a more comprehensive view of it. There may well be other disadvantages or better alternatives for you.

 

[dave29]

thanks for the replies.

 

[Brendan Burgess]

I had never heard of that. How long has it been in existence? I have edited the title of the thread to highlight it a bit better.

Startup Refunds for Entrepreneurs (SURE)
SURE is a tax relief that provides a refund of income tax that you paid in previous years. You can claim the relief if you are an employee, an unemployed person or a person who has recently been made redundant and are starting your own business.

The general conditions for SURE are that you must:

• establish a new company carrying on a new qualifying trading activity
• have mainly Pay As You Earn (PAYE) income in the previous four years
• take up full-time employment in the new company as a director or an employee
• invest cash in the new company by purchasing new ordinary shares
• keep the purchased shares for at least four years.

There are a number of specific conditions that the individual and the company must meet in order to qualify for this relief. Revenue manuals will give further details on these specific qualifying conditions.

 

[newtothis]

I had never heard of that. How long has it been in existence?

I believe a few years now - I availed of it three years ago. It used to be called something else (seed capital scheme), but uptake was relatively poor, so they re-branded it and promoted it more (obviously not enough!). See https://www.localenterprise.ie/News-and-Events/Start-Up-Refunds-for-Entrepreneurs.html

 

[T McGibney]

The benefit in most situations is illusory. You have to commit your funds to share capital which is almost impossible to access without an expensive liquidation.

And you're paying tax on your drawings from the company from the get-go, even when you're still out of pocket in net terms.

Get professional advice before making any irrevocable decisions here.

 

[Brendan Burgess]

Hi Tommy

Ah, that is probably why I had never heard of it.

Do you have a link to any examples of how it works and the pros and cons?

Brendan

 

[T McGibney]

Hi Brendan,

I'm almost certain it has been discussed here in the not too distant past.

 

[newtothis]

The benefit in most situations is illusory. You have to commit your funds to share capital which is almost impossible to access without an expensive liquidation.

And you're paying tax on your drawings from the company from the get-go, even when you're still out of pocket in net terms.

Get professional advice before making any irrevocable decisions here.

I'd agree with the caution to get advice: there are clearly issues with it that need careful consideration. It was critical in my case to getting started. The plan is to build something of reasonable scale that can be sold with five to ten years, so the return will be by selling the shares rather than liquidation. Meanwhile, the refund acted as an interest free loan that never has to be repaid: yes, there are significant strings attached you have to be aware of, but I can assure you the cheque I received from Revenue wan't illusory!

 

[T McGibney]

but I can assure you the cheque I received from Revenue wan't illusory!

Of course it wasn't but neither were the PAYE/PRSI/USC debits you made on your initial salary from the company, while you were still out of pocket in net terms. Swings and roundabouts.

 

[newtothis]

Of course it wasn't but neither were the PAYE/PRSI/USC debits you made on your initial salary from the company, while you were still out of pocket in net terms. Swings and roundabouts.

In practice, I didn't draw anything out for the first six months or so and lived off the refund. By the time it ran out and I could draw a salary the company was profitable enough to pay it: the original investment had done its job and cranked the engine. A couple of years later and the company has more than the original investment sitting in a bank account (waiting to be used for expansion investment), after having drawn a resonable salary in the meantime, though it was nerve wracking in the early months when the cash went almost to zero. That is, I'm in the happy position of having the investment payed off. Yes, the principal isn't readiliy accessible, but it's hardly the only investment where that's the case (investing in someone else's private company for example).

I think we're essentially saying the same thing: there are pros and cons and you should make sure you fully understand them and get advice to ensure that's the case. You seemed more than a little dismissive of it though, which I don't think is warrented: it can work for some people; I doubt I'm alone in having greatly benefitted from it.

 

[T McGibney]

You seemed more than a little dismissive of it though, which I don't think is warrented: it can work for some people; I doubt I'm alone in having greatly benefitted from it.

Ah come on, I did say at the outset:

The benefit in most situations is illusory.

 

[T McGibney]

A couple of years later and the company has more than the original investment sitting in a bank account (waiting to be used for expansion investment), after having drawn a reasonable salary in the meantime, though it was nerve wracking in the early months when the cash went almost to zero. That is, I'm in the happy position of having the investment payed off.

What has happened is that you've gotten tax relief on your original investment, but had to pay tax on the withdrawal of that investment from the company, which had to be in the form of salary. Which is pretty much the same thing as lending to the company at the outset and enjoying tax-free withdrawals of that sum until the full amount was repaid.

As I say, swings and roundabouts.

 

[newtothis]

Ah come on, I did say at the outset:

I should have said "a little dismissive" rather than "more than a little dismissive". Can we leave it at that?

 

[T McGibney]

I stand over what I've said. We thankfully don't need permission to disagree.

 

[newtothis]

What has happened is that you've gotten tax relief on your original investment, but had to pay tax on the withdrawal of that investment from the company, which had to be in the form of salary. Which is pretty much the same thing as lending to the company at the outset and enjoying tax-free withdrawals of that sum until the full amount was repaid.

It's arguable about which funds are which, but as of today, the (amount of) the original investment is sitting in a company bank account. I did have bank loans too by the way, but these were paid off early. I could draw in all out as salary and invest it elsewhere (post tax), or I could use it as planned to fund expansion. In other words, the original investment hasn't been paid out yet. The plan is it won't be and the return will be when the company is sold (the happy case) or when it all goes pear shaped and the investment is lost (the not so happy case).

As you say, swings and roundabouts, as when it is returned I'll have to pay at least capital gains tax on it.

To be honest, I didn't actually calculate whether it was worth doing or not: it was the only way I could make it work. The company needed the full amount I had available or could source from loans to get going. It really was marginal, to the extent I knew I couldn't draw anything out for the initial period. Without the refund to live off for a few months it just wouldn't have happened, so it was essential.