Taxation | Company Start-Ups

Tax Obligations

1. What tax obligations do start-ups have?

Start-ups have various tax obligations, including filing and paying taxes such as income tax, corporation tax, value-added tax (VAT), and payroll taxes, all of which depend on the nature of the company. It is important for start-ups to understand their specific tax requirements, deadlines, and potential reliefs or incentives available to them. Seeking professional advice from an accountant can help ensure compliance and optimise tax planning.

2. What is the difference between a sole trader and a limited company for tax purposes?

In Ireland, a sole trader operates their business as an individual, reporting business income and expenses on their personal tax return. They are personally liable for business debts. On the other hand, a limited company is a separate legal entity, liable for corporation tax on its profits. Limited company directors pay income tax on salaries and receive dividends from company profits.

3. What are the tax implications of hiring employees or contractors in Ireland?

When hiring employees in Ireland, employers must deduct and remit payroll taxes, such as Pay-As-You-Earn (PAYE) and Pay Related Social Insurance (PRSI), from employee wages. Contractors may be subject to different tax treatment, such as the requirement to deduct Relevant Contracts Tax (RCT) in certain construction-related activities. The self-employed tax regime may apply to contractors. Familiarise yourself with the tax obligations and responsibilities related to hiring workers in Ireland to ensure compliance.

Relevant Taxes to Start-Ups

Universal Social Charge (USC)

If you are self-employed, it becomes your responsibility to calculate and fulfill your Universal Social Charge (USC) contributions. On the other hand, as an employer, you have the obligation to deduct the USC from your employees’ wages and promptly remit it to the Irish Revenue Commissioners.

Pay As You Earn (PAYE)

Sole traders are liable to pay income tax on their business profits. The income tax rates for sole traders are based on the individual’s income, and they may be subject to different tax bands and rates. It’s essential to keep accurate records of your business income and deductible expenses to calculate your taxable profit correctly.

Pay Related Social Insurance (PRSI)

PRSI is a social insurance scheme that provides certain benefits and entitlements to employees and self-employed individuals.

As an employer, you are responsible for deducting PRSI contributions from your employees’ wages and paying them to the Revenue Commissioners. The amount of PRSI you deduct depends on the employee’s earnings and their PRSI class.

Further, you have additional PRSI obligations beyond deducting contributions from your employees’ wages. You are also required to make employer PRSI contributions based on the employee’s PRSI class and earnings.

Corporation Tax

Corporation tax is a tax imposed on the profits generated by businesses incorporated under the legal structure of limited companies. Corporation Tax primarily pertains to limited companies, including private companies, public companies, and certain other legal entities recognized by Irish law. If your business operates under the structure of a limited company and engages in trading, investment, or other commercial activities, you will be subject to Corporation Tax.

It is calculated based on the profits earned by your company during a specific accounting period. It is essential to accurately assess your taxable profits by deducting allowable expenses, reliefs, and allowances from your business income. This comprehensive evaluation ensures a precise determination of your corporation tax liability.

Value Added Tax (VAT)

VAT applies to most businesses engaged in the supply of goods and services, including imports and exports, within Ireland. Whether you are a retailer, wholesaler, service provider, or involved in any other commercial activity, understanding the applicability of VAT to your business is crucial.

Businesses reaching or surpassing a certain threshold of taxable turnover are required to register for VAT. The current threshold for mandatory VAT registration in Ireland is €37,500 for the supply of services and €75,000 for the supply of goods.

In Ireland, there are different VAT rates applicable to various goods and services. The standard rate is 23%, but reduced rates of 13.5% and 9% apply to specific categories, such as hospitality, tourism, and certain food products. Zero-rated and exempt supplies are also present within the VAT framework. Understanding the correct VAT rate applicable to your products or services is essential for accurate tax compliance.

VAT-registered businesses are required to file regular VAT returns, usually on a bi-monthly or quarterly basis, providing details of their sales, purchases, and VAT liabilities. It is essential to maintain accurate records and adhere to filing and payment deadlines to avoid penalties and maintain compliance with VAT regulations.

Relevant Contracts Tax (RCT)

RCT applies to specific construction operations, including building, civil engineering, and related activities. It aims to ensure that tax obligations are met by contractors and subcontractors involved in the construction industry. If your business operates in this sector, it is essential to determine whether RCT obligations apply to you.

Principal contractors are responsible for deducting tax from payments made to subcontractors and remitting it to the Revenue Commissioners. This tax deduction acts as a withholding mechanism to ensure tax compliance within the construction sector.

Before engaging subcontractors, principal contractors must verify their tax compliance status. This involves checking if subcontractors are registered for RCT and ensuring they have a valid Tax Clearance Certificate. Failure to adhere to these verification requirements can result in penalties and liabilities for both parties involved.

The RCT deduction rates vary depending on the subcontractor’s tax compliance status. The rates range from 0% for tax-compliant subcontractors to higher rates for non-compliant entities. Principal contractors must correctly apply the applicable RCT deduction rates to ensure proper tax withholding.

Need more specific advice?

Complying with the tax regulations for your company is essential to avoid penalties. Strategic tax planning can help optimise your tax position by availing of the available reliefs and allowances, which depend on the nature and size of your business. Contact us and we can assist you with your taxation queries.