Entrepreneurial Relief | What Contractors Need to Know [Webinar Transcript]

This webinar, “Entrepreneurial Relief | What Contractors Need to Know”, is the third episode of a four-part series focusing on contracting in 2022. In this session, Gillian Buckley – the Contractor Care Specialist at Berkley – is joined by Sean Piggott – Business Development Manager at Icon Accounting.

 

 

 

Entrepreneurial Relief

 

What is Entrepreneurial Relief?

 

Entrepreneurial Relief is a Capital Gains Tax Relief that was first introduced in 2014. However, a Revised Entrepreneurial Relief was then announced and delivered in 2016.

The relief gives a reduction in Capital Gains Tax from 33% to 10% on the disposal of shares in a trading company – this includes liquidation. We find that the most popular way that contractors in Ireland take advantage of Entrepreneurial Relief is when they liquidate, their company.

There is a lifetime limit of €1 million on the gains that you can claim relief on.

 

Entrepreneurial Relief: Caveats To Be Aware Of!

 

Firstly, the relief can only be applied to Personal Limited Company structures. As such, many contractors decide to make the move from an Umbrella structure to a Personal Limited Company in order to avail of this relief. To learn more about how to make the switch today, watch our dedicated webinar “The Right Time to Move | From Umbrella Company to Your Own Personal Limited Company.”

 

There are other conditions that also need to be met before claiming the relief:

 

• Must own greater than 5% of the share capital within the Personal Limited Company
• Required to have the shares for a continuous period of 3 years out of the previous 5 years at the time of application
• The individual must have spent a minimum of 50% of their time in the service of the company as a Director/Employee
• Must be a qualifying trading business

 

What Is A Qualifying Trading Business?

 

The vast majority of businesses that are involved in Contracting would qualify as trading businesses.

 

An example of a company that wouldn’t qualify as a trading business is a business that has been set up to manage investments e.g. property management company, or a company used to invest in shares.

 

If your business doesn’t qualify as a trading business, then you will not able to apply for Entrepreneurial Relief. 

 

What Does Entrepreneurial Relief Look Like?

 

Tax Advantages

Without Entrepreneurial Relief	With Entrepreneurial Relief
Marginal rate of income tax = 52%	Capital Gains Tax @ 10%
	Corporation Tax @ 12.5%
	Professional Service Surcharge @ 6.56%
	Liquidation fee

 

Most contractors that use an Umbrella Company structure will have all of their payroll processed upon receiving their invoice. In other words, when the client sends you the invoice, 100% of that invoice will be processed to you as payroll. 

 

One of the main advantages of switching to a Personal/Private Limited Company structure is that you don’t have to process all of the income that you receive through your invoices as payroll. This is because you don’t have to take 100% of the funds as they’re invoiced. 

 

Let’s say you are invoicing a client for €8,000 a month i.e. €400 a day at 20 days per month. You don’t have to process the entire €8,000 as payroll. Instead, you can keep €2,000 in your business bank account and process the remaining €6,000 as payroll. While this will reduce your income, it does mean that you still have €2,000 in your bank account and this is where the Corporation Tax will be applied. 

 

Professional Service Charges

The surcharge tax is equal to 15% of 50% of the undistributed reserves (or retained profits). This equates to 6.56% of the company’s profits in a year. To learn more about Professional Service Charges, read this useful guide from Icon Accounting.

 

What Does Entrepreneurial Relief Look Like: A 5-Year Case Study

 

In the below example, the Contractor is invoicing their client for €500 per day. They earn a €70,000 salary and claim €7,000 in expenses. They retain a profit of €35,000.

  

 

 

Retirement Relief

 

What is Retirement Relief?

 

Retirement Relief is another form of Capital Gains Tax Relief. This is a relief on Capital Gains Tax (CGT) when disposing of any part of your business. CGT is 0% for this relief.

Although this is referred to as Retirement Relief, you do not need to retire from the business.

If you are 55 or older, you might be able to claim Retirement Relief.

There are two types of Retirement Relief, depending on if you dispose of your business to your child, or to someone outside of your family.

 

Typically, the maximum value is €750,000 however, this can be reduced in certain circumstances.

 

Retirement Relief: Caveats To Be Aware Of!

 

Again, the relief will only apply to your own Personal Limited Company structure. Many contractors make the change from Umbrella to PLC in order to avail of Retirement Relief. 

 

There are other conditions that also need to be considered before claiming the relief:

 

• Must be a minimum of 55 years of age – if you are 66+ the maximum value is €500,000
• Must own 25% of the voting rights (or 10% if your family owns 75%)
• Must be a trading company
• 10 years of ownership is required
• Working director for 10 years, 5 of which must be on a full-time basis

 

What Does Retirement Relief Look Like?

 

Tax Advantages

Without Retirement Relief	With Retirement Relief
Marginal rate of income tax = 52%	Capital Gains Tax @ 10%
	Corporation Tax  @ 12.5%
	Professional  Service Surcharge @ 6.56%
	Liquidation fee

 

10-Year Case Study

In the below example, the Contractor is invoicing their client for €400 per day. They earn a €50,000 salary and claim €7,000 in expenses. They retain a profit of €35,000.

 

 

 

Sean’s Top 3 Tips for Claiming Entrepreneurial and/or Retirement Relief

 

• If you aren’t sure, speak to your provider and they can advise on your scenario!
• It does require discipline, but you shouldn’t be struggling as a result!
• You can reach out to your accountant/provider to put a plan in place!