Tax Incentives available for a business by James McMahon and Conor Burke
Tax Incentives available for a business
by James McMahon and Conor Burke
Starting a business can be an exciting and challenging process. One of the many important aspects to consider is taxes. As a business owner, you should have an understanding of the tax incentives available to you throughout the company’s life cycle. These incentives can help you save money and re-invest it back into your business, helping it to grow and thrive.

In this article, we will explore the different tax incentives available for businesses throughout the various stages of a business’s life cycle.

Stage 1: Start-Up of the Business
Start-up companies in Ireland have access to a number of tax incentives and reliefs, including the Start-up Refunds for Entrepreneurs (“SURE”) relief and the Employment and Investment Incentive (“EII”) scheme. These incentives are designed to encourage entrepreneurship and investment in start-up companies.

1. SURE Relief

To qualify for SURE relief, various conditions are required to be satisfied. A sample of the conditions that are required to be satisfied are outlined below:

  1. A new company must be established;
  2. The company must be carrying on a qualifying trade, which for example, excludes the provision of professional services (i.e. finance, accountancy, legal services) and also financing activities;
  3. The entrepreneur’s income source in the previous years must have been mainly liable to PAYE;
  4. The entrepreneur must take up full time employment in the new company;
  5. The entrepreneur must invest cash into the new company;
  6. The new company must issue shares to the entrepreneur in consideration for the cash invested;
  7. The entrepreneur must hold at least 15% of the ordinary share capital of the company for one year from the date the investment was made.

SURE allows an investor/entrepreneur to claim a refund of tax paid in the year the shares are issued or in any of the previous six years. An individual can claim SURE relief on two investments in total, up to a limit of €700,000 each time. The maximum amount of relief available for offset in a year of assessment is €100,000.

If an individual has invested more than €100,000 per year of assessment (as set out above) or does not have enough income to absorb the full relief in a year or over the preceding six years, then the unused amount may be carried forward for offset against total income in future years.

person with hands on laptop about to preview a presentation
2. EII Relief

EII is a tax incentive for investors as it offers tax relief of up to 40% of the investment made in certain corporate trades. EII allows an individual investor to obtain income tax relief on investments for shares in certain companies up to certain limits each tax year.

Therefore, it would be beneficial for companies to be a “qualifying” company for EII purposes as investors may be able to claim tax relief on their investments in these companies. There are numerous conditions that a company is required to satisfy in order to be a qualifying company for EII purposes.

These are summarised below:

At the time the shares are issued to the investor:

  • The company must be incorporated in the State or EEA State;
  • Must be a micro, small or medium sized enterprise;
  • Must not be an undertaking in difficulty;
  • Must be an “unlisted company”;
  • The company cannot be subject to an outstanding recovery order;
  • Must hold a tax clearance certificate.

For four years after the issue of the shares:

  • The company must be tax resident in the State or EEA State;
  • Must carry out trading activities only;
  • In general, it cannot control or be controlled by another company
  • The company must have their shares fully paid up

On the three year anniversary post the issue of the eligible shares:

  • The company must have increased their level of employees and
  • increased the amount paid to these employees or
  • increased the amount spent on R&D&I on this date, compared to the year prior to the year that the shares were issued.

Both the SURE relief and the EII scheme can provide valuable support to start-up companies, helping to encourage entrepreneurship and investment in new businesses.

3 people engaged in conversation
Stage 2: Expanding the Business
Research and development (“R&D”) tax credits and providing shares via the Key Employee Engagement Programme (“KEEP”) or by issuing growth shares to employees are tools that can help a company during its expansion phase.

1. R&D tax credits

R&D tax credits are a tax incentive to encourage companies to invest in R&D activities. A company is entitled to a tax credit, equivalent to 25% of qualifying R&D expenditure incurred. The R&D tax credit can be offset against the company’s corporation tax liabilities arising or it can be used to reward key R&D employees within the company by reducing their personal income tax liabilities.

One of the conditions to claim this relief is that expenditure must have been incurred wholly and exclusively in the carrying on by the company of qualifying R&D activities. Eligible expenditure includes employee costs, plant and machinery, buildings, materials, overheads and outsourced R&D.

2. KEEP and Growth Shares

Issuing shares via KEEP or by issuing growth shares to employees are a way for companies to incentivise key employees and retain talent.

KEEP is a tax incentive, which is designed to help companies attract and retain key employees. We have briefly outlined below some of the key benefits of the KEEP scheme:

  • The KEEP scheme allows employees to receive share options in their employer’s company without being subject to income tax at the time the options are exercised. No tax is incurred by the employees until they sell the shares, where they would be subject to capital gains tax on any gain earned;
  • Offering share options through the KEEP scheme can help companies retain key employees by aligning their interests with the company’s long-term success. This can be particularly important for high-growth companies that need to retain key talent.

Similarly, growth shares give employees the right to a share of the company’s future growth, often in the form of an increase in the company’s share price. This can also be a powerful motivator for employees, as it aligns their interests with those of the company.

Together, R&D tax credits, the KEEP scheme and growth shares can help a company expand its business. R&D tax credits can assist in providing the necessary cash flow which can assist in driving growth and innovation. Meanwhile, by issuing shares via the KEEP scheme and by issuing growth shares to employees, it can incentivise key employees to stay with the company and contribute to its growth. The KEEP scheme can be a valuable tool as no income tax is payable by the employees on the exercise of the shares, unlike other share schemes.

Stage 3: Exiting the Business
The ultimate aim of many entrepreneurs is to exit the business at a time when the business is highly valuable. The ability to potentially avail of Revised Entrepreneurs Relief or by inserting a holding company may be of relevance to individuals who wish to ultimately sell their business in the future.

1. Revised Entrepreneur Relief

Revised Entrepreneur’s Relief provides for a reduced rate of capital gains tax i.e. 10% on the disposal of qualifying assets made by an individual, up to a lifetime limit of gains of €1 million. Various conditions are required to be satisfied in order to claim Revised Entrepreneur Relief and these are summarised below:

  • The asset, which is being disposed of, must be a qualifying business asset. A qualifying business asset includes shares in a trading company.
  • The individual must have owned not less than 5% of the ordinary shares for a continuous period of three years at any time prior to the disposal;
  • The individual must have spent 50% or more of their working time as an employee/director of the company in a managerial/technical capacity for at least three of the five years immediately prior to the disposal

Any chargeable gains in excess of €1,000,000 are subject to CGT at the normal rate of 33%.

2. Insertion of a Holding Company

As outlined above, should an individual dispose of the company whilst holding the shares directly in that company, they would be subject to capital gains tax at 10%/33%. However, should an individual reorganise their shareholding in the trading company so that the shares in the trading company would be held by a holding company, the disposal of the trading company may be exempt from capital gains tax.

The disposal of a subsidiary company by an Irish tax resident holding company will be exempt from CGT where certain conditions are satisfied. We have summarised these conditions below:

  • At the time of disposal the subsidiary company must be tax resident in either a “relevant territory” (i.e. the EU, including Ireland) or in a country that has a tax treaty with Ireland;
  • The subsidiary company must be wholly or mainly trading;
  • The holding company must, within an uninterrupted period of not less than 12 months, hold at least a 5% shareholding in the subsidiary company, whether directly or indirectly.

By incorporating a holding company structure, it allows the sale proceeds to flow into the holding company tax-free should the above relief apply and thereafter, allows the entrepreneur to use all of the disposal proceeds to invest in other projects.

Overall, Revised Entrepreneur Relief provides a benefit for business owners, as they are potentially able to avail of a lower rate of capital gains tax i.e. 10%. However, should the individual wish to re-invest the proceeds from the sale of their business into a new enterprise, it may be beneficial to insert a holding company structure so that the individual can receive the sale proceeds into the holding company tax-free.

3 people having a discussion over coffee, notes, and a laptop
In conclusion, tax incentives are an essential component of a business’s life cycle, offering businesses the opportunity to reduce their tax burden and increase their profitability. As outlined above, there are various start-up, growth-focused and exit incentives available to businesses.

Taking advantage of these incentives can help businesses grow, innovate, and ultimately exit their businesses in a more tax-efficient way. Business owners should work closely with tax advisors to ensure they are aware of the tax incentives available to them and how to structure their businesses to maximise their benefits. By doing so, they can increase their competitiveness and achieve long-term success.

James McMahon
James McMahon
Director of Tax – Grant Thornton
Conor Burke
Conor Burke
Manager – Tax – Grant Thornton