When to incorporate for tax reasons?

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24601

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My accountant recently advised that I incorporate to avail of the 12.5% CT rate. However, I don't personally think I'm turning over enough to justify it. I provide professional advisory and consulting services, and up until last July I also had reasonable PAYE income also coming in. I bit the bullet in August and went full-time sole trader and as a result my turnover nearly doubled in 2018 which led to my accountant suggesting incorporation, but I'll still only turnover around €90 - €100k this year, and if a contract or two is lost it could be as low at €70 - €80k.

I don't yet own a house and I would be looking to draw down a salary of €50-70k so I'm not sure if incorporating is the most sensible thing to do, but I'm finding it hard to identify all the pros and cons from the tax point of view. I have no business debts and will be very unlikely to need to borrow given the type of work I do so limited liability in that respect is of limited value. My main concern is that I'll need the money in the next 3 -5 years to put towards a house so I'll be paying 12.5%CT as it accumulates and then taking it out at the marginal rate, which seems madness.

I've tried searching the forum but a lot of similar threads are very old so apologies if this has been explored elsewhere.
 
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Are you sure it was an accountant you were talking to?
I wouldn't do it for tax reasons, unless you have an angle to apply entrepreneur relief on capital gains.
But lots of other reasons (limited liability...) to incorporate.
 
I agree with Red Onion - at your fee income there would be little tax advantage in you incorporating. However I would incorporate for limited limited liability alone purely especially given the nature of your business. Tax benefits do accrue with incorporation but only at higher levels of income..
 
dublin67 said:
I agree with Red Onion - at your fee income there would be little tax advantage in you incorporating. However I would incorporate for limited limited liability alone purely especially given the nature of your business. Tax benefits do accrue with incorporation but only at higher levels of income..
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But if I have and will not have any creditors what would be the value of limited liability? Also, at what level of income is incorporation a good idea? I presume it largely depends on personal circumstance/spending habits etc.?

@RedOnion - it was certainly my accountant, yes. I was a bemused at the suggestion so I just wanted to see if I could find out more before declining.
 
Basically if you incorporate, you will withdraw largest salary possible to save in your own bank account. This 'largest salary' will drive a loss for corporation tax so you won't be paying the 12.5% However you will be paying at the marginal rate of income tax.

Stay as you are for now. Paying the same taxes (give or take) but without extra expense of corporation tax returns now.
 
24601 said:
But if I have and will not have any creditors what would be the value of limited liability?
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For example, being sued for something that your professional indemnity doesn't cover.

As an aside, some large companies won't grant contracts to sole traders.
 
Thanks everyone. There doesn't appear to be any discernible tax advantages but I'll have to research the limited liability aspect in more detail to decide whether the extra cost/hassle is worth it for whatever additional protection there is above and beyond my PI coverage. I'm assuming that my accountant is anticipating another significant jump in fees earned for 2019 but that is unlikely to be the case as most of the jump came from the replacement of the PAYE work with a more valuable contract.
 
The answer to your query is “it depends”.

There are huge advantages to incorporating:

- You can liquidate the company at age 55 and extract up to €750k tax-free or €1m at 10% after a three year period

- You have limited liability

- The company can make far larger employer pension contributions than you could otherwise do as an individual

- You can claim mileage

- The company can pay you tax-free redundancy

It’s not the level of turnover per se that drives the agenda; it’s your income requirement. It’s cheaper to set up and run a company these days (CoSec, audit exemption, tax compliance, etc) so at €100k a year it might be worthwhile, but not if you need to draw €100k of salary.

Similarly at €200k or even €300k.

However, for someone who only needs their 20% rate band (i.e. €35k or €45k), for example, it can make huge sense.

I think I’d be looking for something like a €50k surplus post salary (or salaries if paying a spouse €25k a year makes sense) in order to make it worthwhile.
 
I think accountants hate companies like Contractors Plus who set up umbrella companies for you. It cuts accountants out of the action. That's why a lot of them are recommending going the limited company route, with them doing the end of year books etc. That's what my accountant did. Just so happens though that I enjoy being a limited company, and all the paperwork etc. I do my own VAT3 and PAYE returns. I also love running a payroll through Sage etc.

Be careful of claiming mileage. If you have a number of clients, you can probably get away with it, but if you are travelling to the one place of work every day, they won't let you claim the mileage.
 
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