Bizstartup.ie - Start Up Kit

“You need to set out clearly, as far as you can, what liabilities you’re going to have over the next 12 months and how you can manage those. Can you spread them; can you pay them quarterly rather than monthly if appropriate? At the very least, clearly identify when you’re going to need cash to pay tax, whether it’s for your company or as an individual if you’re a sole trader.”

At the end of this process, he says, the business should have a plan in place to manage the demands that will be made on cash flow, and be aware of the key dates for compliance across all of the tax heads.

“It is very important to remain complaint in the current environment,” he points out. “The businesses that survive will be the ones that remain compliant and don’t fall into arrears. That’s a very easy thing to happen.”

While it can be tempting for companies to put tax payments on the long finger when things are tight, Barrett would caution strongly against this. “Don’t go there,” he says. “Once you fall into arrears, and you’re trying to play catch up, that’s a difficult place to be. Sometimes it’s unavoidable – people just find themselves with these problems – but having a plan will certainly help in reducing the likelihood of that happening.”

Take account of reliefs

Tax plans should also take account of any reliefs businesses can avail of, says Barrett. “Can you get investment in through the Business Expansion Scheme? Can you get tax back through the Seed Capital Scheme if you’ve set up a company? That’s something topical now where people who have been made redundant are maybe setting up a business for the first time, and find they may be due refunds of tax on what they would have paid on their salaries over the previous number of years.”

Another possibility is research and development (R&D) relief. “You might think that you’d need to have a lab to be claiming R&D relief, but that’s not necessarily the case. There’s a broad-enough definition of what constitutes R&D and there are significant tax credits and, with the new regime this year, you can actually get refunds in certain situations.

“At a more basic level, you need to be making sure that you’re claiming for all your allowable expenses against tax,” continues Barrett. “If you’re an owner-managed business, you can legitimately utilise things bought by the company, like phones and laptops – provided any private use is incidental.”

Businesses can also claim against bad debts. “From a tax perspective, if a bad debt is quite specific and you can clearly show it’s unlikely you’ll get paid and you provide for that in the accounts, then you’ll get a tax deduction for it. It’s a matter of doing that exercise and paying close attention to your bad debts and providing for them.

However, it is important to be specific. “If you take a broad stroke approach and do a general provision – my amount of debt recovery is down by 30pc – you won’t get a tax reduction. If you can say Murphy and Co. owe me X, it’s out there for 18 months, I’ve started legal proceedings and I’m never going to see that money, I’m providing for it – then you’ll get a tax reduction for it.”

Options for start-ups to consider

Another option for sole traders is to think about incorporating their business. “There are pros and cons to this and people have different views,” says Barrett. “The argument is very live now for a number of reasons: the difference between the 12.5pc rate and the higher income tax rates and levies is growing all the time. You could be looking at a high earner being taxed at close to 55pc versus a 12.5pc rate in a company. So, more and more people are looking at incorporation.”

Start-ups may also avail of an initial tax holiday, where they don’t pay tax on their profits for the first three years, up to a limit of €40,000 of tax liability – in other words, the company can make a profit of up to €320,000 before they’ll be required to pay tax. This was introduced in the 2008 Finance Act.

The fact that the values of companies have taken a hit in the past couple of years may be an advantage for smaller companies where succession is being considered. “If you’re looking at passing to the next generation, now may be a good time to do that,” says Barrett. “If a company was worth €10m two years ago, it might be worth €5m now, so the potential tax liabilities that could arise on the transfer of the business, capital taxes or stamp duty, would reduce in line with the reduction in value.”

This is an extract from an article which first appeared in Business Planning 2010 in Owner Manager magazine