Start-ups’ Tax Relief is a Big Disappointment

Start-up Companies can now avail of a major new tax relief, but unfortunately it is not nearly as attractive as it sounds.

The Revenue Commissioners  this week published a detailed guide to the new Corporation Tax relief for new start-up companies.

How the Scheme Works

Qualifying companies will be fully exempt from Corporation Tax on profits up to €320,000 each year.  There is partial relief available for companies with taxable earnings above this figure. The relief applies for the first three years of trading.

To qualify a company:

• must have been incorporated on or after 14 October 2008,  and
• must commence trading in 2009 or 2010, and
• must carry on a genuinely new trade.

If the company merely takes over an existing trade, or a part of a trade, carried on by another individual or company, it will not qualify.

Some industry sectors are barred from claiming the relief.  These include:

• land  and property development
• mining exploration and extraction of natural resources
• fishing or agricultural activities
• export-related activities
• agricultural production, processing or marketing
• road freight and haulage
• the coal sector

Is the Relief any good?

The relief will be a lucrative one for any company lucky enough to use it to the maximum extent possible. A €120,000 tax saving over three years is not to be sneezed at. That said, it is hard to tell just how many companies will benefit greatly from it – I suspect that very few will.

For a start, many prominent business sectors are excluded, presumably in order to comply with EU State Aid rules.

In addition, most start-ups don’t earn enough profits in the start-up phase to have large Corporation Tax bills. Many lose money in the early stages and only recoup these losses later on.  For the minority that are profitable from day one, our low 12.5% Corporation Tax rate isn’t exactly a massive burden.

I have yet to see a company fold because they couldn’t afford to pay their Corporation Tax bills, yet problems with other taxes, namely VAT, PAYE/PRSI  and Relevant Contracts Tax can cripple a business overnight.

And if a company generates large profits and avoids Corporation Tax on these earnings, they still face a substantial tax hit if they wish to distribute these profits to shareholders.

And finally…

This tax relief has been widely welcomed and hailed as a much-needed boost for enterprise.  I must confess that I disagree. In fact,  I can’t help viewing it as a major disappointment. It reminds me a bit of the culture of the old “Yes Minister” TV series, where worthwhile political initiatives were announced with great fanfare only be rendered useless by bureaucracy and red tape.

What do you think?