Tax Consideration When Starting a Business
Every business owner will agree that the sole purpose of starting any good business is to make a profit. But what happens when this business turns into a burden and incurs losses instead? This could happen if a business owner heads into a business without knowledge or consideration of certain key factors. One of these key factors is tax payment.
For one who may be oblivious, tax is any compulsory fee charged by the government on businesses or individuals for funding government expenditures. Evading tax payment is punishable by law. Therefore, as an entrepreneur starting your new business, it is almost dangerous not to consider tax payments.
In this article, we would be looking at tax consideration to look at when starting a business.
1. Are You Trading as a Sole Proprietor or Via a Company?
Before you kick-start a business, a business owner must have decided on how to run the business. Your business’s size will go a long way to determine if you would run it solely or as a company with employees.
It is a known fact that the best time to incorporate your business is when it can generate taxable income above what you need as an annual income. This is a very valid logic.
2. Tax Rates
When setting out in your new business, the importance of applying the tax rate on your profit cannot be over-emphasised. For example, if the business owner manages or controls the business from somewhere like Ireland, he ought to remit 12.5% of the tax rate corporation. Subject to some conditions, new businesses may get an exemption from corporation tax for about 3 years.
The 3-year exemption on the corporation tax rate of 12.5% is quite interesting. However, the business owner must understand the vulnerability to the additional charge of the close company’s corporation tax. This is especially if he is trading via a company and has extracted money from the business efficiently.
3. Tax because of Business Transition
As a sole proprietor who may think of initiating a transition from a sole proprietorship to a company, you need to know that this transition can spring up tax liabilities like capital tax gains. With the aid of tax reliefs and planning, a business can incorporate without setting off tax costs. For instance, Section 600 Taxes Consolidation Act 1997 of Ireland enables a legit transfer of assets from a sole proprietor to a new company. This is for the new company’s shares with no tax arising because of capital gains. However, if you don’t do the transition from a sole proprietorship to a company properly, a 6% stamp duty bill is workable.
Before setting out on your new business, it is very important to perform some important tax registration with the authorities. You may have to fill some forms that are used to register your business for corporation tax, VAT, PAYE, etc. A business owner should do the registrations as soon as he creates the business and is ready to carry out operations.
5. Filing Returns and Payment of Tax
As a new business owner, it is important to note that your company must file a return of your profit and taxable profits to Revenue. This should be done at least 9 months after the accounting period and on any day before the 21st day of the month. Note that failure to file your company’s return attracts certain consequences as surcharges.
A delay in filing returns of profit may limit a huge number of reliefs and allowances owned by the business.
Businesses must pay 90% of their chargeable liability for an accounting period as initial tax in one instalment. This should be done over 31 days before the end of the accounting period, but not after the month’s 21st day.
However, businesses that we describe as “small businesses” have the alternative to do their initial tax calculation on 90% of their expected corporation tax liabilities or 100% of the last accounting period.
6. Is Your Business a Close Company?
A lot of benefits offered to participants (for example, shareholders) are called distributions. This implies that no corporation tax subtraction is accessible to the company for the charge. It must put in 20% dividend withholding tax to the selected distribution payment.
The tax authorities can impose a close company checkout fee of 20% of a business’s distributable rental and investment income. This occurs if the business has not made a distribution of the important income within 18 months of the accounting period’s termination.
If the close company is into professional services (such as an engineering company) a checkout fee of 15% may appear on 50% of the distributable trading income of the business if they do not make a distribution within the same period
7. Close Company Surcharge Planning
A surcharge does not apply if a business has no distributable reserves. Liquidations can be very terrible, especially if it involves close companies. They require extra care when a company is vulnerable to a close company surcharge. This occurs especially when it is a voluntary liquidation. A company like that cannot make distributions if they provide a liquidator. For that reason, a close company at the brink of liquidation may consider disbursing a dividend before assigning a liquidator.
These are just some of the factors to put into consideration before kick-starting a new business. It also helps to use the services of a tax or accounting expert to help you navigate these requirements with ease. When these issues are properly dealt with correctly, kick-starting your business will almost be hassle-free.