We are going to look at some Corporation Tax tips to help your company save taxes. Larry Barry owns 100% of an engineering company Barry Can’t Swim Ltd. It arrives at my desk to review the taxes. Larry is a good man to throw a few tax conundrums our way and he certainly didn’t disappoint us this year. Let’s take a look at some of the main ones to include
- New company car
- Income Protection
- Director’s current account
- Surcharge
- Summary
New Company Car
Fair play to Brenda she has the invoice for the purchase of the new company car. It’s a Mercedes EXB1 all-electric [don’t waste your time googling, I made this name up]. It’s a PCP finance arrangement. My few brain cells perk up and some must start to rub together. I am thinking of accelerated capital allowances, VAT, and how do we treat a PCP again.
The car cost €75,750. Of that €13,250 was VAT and €4,680 was VRT. So €18k winging its way to the Department of Finance coffers.
Accelerated Capital Allowances
Being a 100% electric car the company can get accelerated capital allowances. The car must be 100% electric to qualify. So, a hybrid car is not 100% electric and wouldn’t qualify. But a specified limit applies. The specified limit is €24,000. This limit was set about 20 years ago when amazingly enough the price of cars was a lot lower!
The tax write-off for the company is either
- 5% per annum for 8 years or
- The full specified limit of €24,000 in year 1
A no-brainer. Take the €24,000 deduction in the first year.
Let’s say the taxable profit of the company in 2023 is €50,000. The corporation tax computation would look like this
| Adjusted Profit for taxes | €50,000 |
| Less Capital allowances | €1,000 |
| Less Accelerated allowances | €24,000 |
| Taxable Profit | €25,000 |
| Tax payable 12.5% | €3,125 |
If the company goes for the normal tax write-off over 8 years the numbers look like this
| Adjusted Profit for taxes | €50,000 |
| Less Capital Allowances normal | (€1,000) |
| Less Capital Allowance car | (€3,000) |
| Taxable Profit | €46,000 |
| Tax payable 12.5% | €5,750 |
The tax saving for a professional services company is even higher at close to 20%. See more below. A tip for those of you filling in Corporation Tax returns for clients. The accelerated capital allowances number has a specific box on the CT return. The €24,000 goes into the Machinery & Plant – energy efficient equipment – S285A box.
VAT
You could be thinking why is he talking about VAT? Sure, you can’t claim VAT on a car because it’s not a commercial vehicle. And you are right. But it is possible to claim 20% of the VAT cost provided the car is in use for 60% or more of the time for business purposes.
This partial recovery of VAT applies to cars with low C02 emissions. These are Band A and B when first registered for VRT on or after 1 January 2021. Up to that date, CO2 emissions bands A, B, and C qualified.
The 60% business usage applies for 2 years or more. Revenue have issued guidelines on the 60% business use question. They are not very detailed or clear, but I would note the following
A car, that is used for business purposes for a five-day working week, can be regarded as having been used for 60% business purposes for that weekThe VAT deduction for the company on the car will be
| VAT cost of the car | €13,250 |
| 20% of the VAT cost | €2,650 |
Larry does his own bookkeeping and wasn’t aware of this. So, he’s a very happy man when we tell him that he can take a deduction for this in his next VAT return.
Personal Contract Plan – PCP
From a Revenue point of view a PCP is like a Hire Purchase [HP] agreement. So, like an HP, when you enter into a PCP agreement the ownership of the goods, or the car, in this case, passes to the buyer. As the owner, you can then claim capital allowances. Plus, you can claim a deduction for the loan interest as a business expense.
Because it’s not a finance lease you don’t get a deduction for the repayments.
Income Protection
Barry Can’t Swim Ltd is making Income Protection payments to Aviva for €300 a month. The purpose of an Income Protection policy is to pay an Income to the individual covered if he/she can’t work. These policies are important given that your income pays the mortgage and all the bills. The company gets a business deduction for the premium as it’s a normal business expense.
While we can see the payments, we don’t have the policy document. The key question in my review is if there is a claim. Does the money go to the company, or does it go to Larry? The reason for that question relates to benefit-in-kind [BIK]. If the money goes to Larry, then the premiums are a BIK for Larry. In that case, the premium cost would go through payroll to capture the taxes on the BIK.
But if the proceeds go to the company, then there is no BIK. The company would use the money and continue to pay Larry his salary. The salary is subject to the usual payroll deductions as normal. So, it makes sense for the company to receive the money and avoid the BIK.
Director’s Current Account
At the end of 2023, I can see that Larry owes the company €3,000. He needed to get his hands on some money to clear a tax bill and took it from the company in November 2023. You might think that sure it’s his company and why can’t he take the money? A fair enough assumption. But that’s not the case.
The money in the company belongs to the company even though Larry owns 100% of it. He can take the money out by salary or dividend. While he can take a loan from the company there are company law and tax rules around this. I will look at the tax rules. These are
- The company must pay Income Tax at 20% on the grossed-up value of the loan and
- Larry is liable to BIK on the value of the loan.
Income Tax & BIK
The net loan is €3,000 or 80% of the gross amount. To gross it up, you divide by 80 and multiply by 100 or divide by 8 and multiply by 10. Then the company pays this 20% Income Tax on the gross amount with its corporation tax liability.
| Net Loan | €3,000 |
| Gross loan €3,000/8 x 10 | €3,750 |
| 20% of gross loan | €750 |
As you can see the number is the same as multiplying the net loan by 25%. Don’t worry I don’t want to confuse you but show you the correct way to do it per the table.
If Larry repays the loan before the Corporation Tax return filing date, then there is no need to pay Income Tax. This is the 23rd of September 2024 for a 31 December 2023 year-end. And if he doesn’t repay the loan by then but pays it at a later date then the company can get a refund of the tax deducted. Let’s assume he paid back €2,000 in December 2024. In the 2024 CT return, you would claim back 2/3rd of the Income Tax deducted which is €500.
Given that Larry only had the loan for 2 months we will apply the BIK rate of 13.5%. A lower rate of 4% applies if the loan is a home loan used to purchase, repair, or improve your home. The BIK rate applies to the net loan.
| Net loan | €3,000 |
| BIK rate 13.5% | €405 |
| 2 months is 1/6th of the year | €68 |
We will include this BIK in Larry’s income tax return for 2023.
Surcharge
For professional services company, a surcharge applies. The effect of the surcharge is to bring the corporation tax rate close to 20% from 12.5%. Engineering is a professional service, so a surcharge applies to the profits. How you calculate the surcharge is as follows
| Adjusted Profit | €50,000 |
| Less Capital allowances | €25,000 |
| Taxable Profit | €25,000 |
| Deduct CT 12.5% | €3,125 |
| Net Trading Profit | €21,875 |
| Deduct 50% | €10,938 |
| Surchargeable amount | €10,937 |
| Surcharge 15% | €1,641 |
Dividend
Larry could take a dividend from the company within 18 months of the year end to avoid the surcharge. So that’s on or before the 30th of June 2025 for a 31 December 2023 year-end.
The amount to take is €2,000 less than the net trading profits after deducting the CT. That is €21,875 less €2,000 which comes to €19,875. The dividend route isn’t tax-efficient in most cases. The company must pay a dividend withholding tax of 25% to Revenue. And the owner will be liable to marginal rate tax on the gross dividend. But he or she will get a credit for the withholding tax paid.
Summary
The above is a sample of some Corporation Tax tips we give our company clients. The aim is to minimise the tax they pay and to keep everything above board with Revenue. You would think that a one-man company like Larry’s would be straightforward. But as you can see that’s not always the case. I was at an Omnipro course a few years ago on Corporation Tax. The lecturer was of the view that a lot of smaller accountancy firms didn’t bother with some of the things above. That shocked me as this leaves their clients exposed to tax, plus interest and penalties in the event of an audit.
Do you want to be as happy as Larry? If so, start here
