Funding business expansion is a key area for clients as they grow their operations. The ability to finance future ventures tax efficiently is a common query and particularly relevant in a recovering economy. The Irish holding company regime offers significant benefits and reliefs, but has to be navigated correctly as there can be unexpected pitfalls. Particular care is required with joint ventures when negotiating terms that provide a tax efficient outcome for both sides. Regulatory prohibition on the incorporation of some professions and the uncertainty around others can be a barrier for growth.
Privacy is another concern for many businesses and particularly directors. Legislation now requires certain accounts published with the CRO to include directors’ salaries. This is sensitive information for business owners and produces a security risk for high earners that should not be underestimated.
In addition to the publication of salaries, the provision of increased financial information may also impact on the competitive nature of a business. In the past, many companies used a non-filing structure, taking advantage of the ability of unlimited companies to be exempt from submitting accounts to the CRO. These structures have been adversely impacted by recent EU legislation and in their typical form no longer work. There are solutions to address these queries, but it remains a concern for clients.
Long term planning is generally based around maximising the value of the business and creating appropriate structures to facilitate a tax efficient exit strategy. The high level of personal tax rates makes corporate structures far more attractive to successful entrepreneurs. Exit strategies often look to capitalise on Retirement Relief or Revised Entrepreneurs Relief. These are capped at €750,000 and €1,000,000 respectively. There are other options, such as utilising trusts or even changing residence, with Portugal being a firm favourite. Due to the high rate of capital taxes and the relatively low thresholds for reliefs, these options are now more frequently explored.
The difficulty clients are facing is exacerbated by the ongoing uncertainty around the post-Brexit landscape. Each case is individual and concerns include import and export changes, staffing, logistics, competition, regulatory matters and the impact on current corporate structures. Without knowing exactly what is going to happen, putting an effective plan in place is a challenge. The first step has been to identify the potential threats, but also the prospective opportunities that may be provided by Brexit and considering the courses of action that could be followed depending on the outcome of negotiations.
The complexity of the VAT system is always an issue for clients. For small businesses starting off, and which complete their own returns, mistakes are common. These might not be picked up until 18 months later when their accounts are being prepared. The ever-increasing global nature of businesses means that cross-border VAT issues increase — and add a layer of complication. Employment costs and employer’s liability offer another challenge. Hiring external self-employed consultants is the preferred model in many sectors, but an area that is scrutinised by Revenue.
Tax efficient exit strategies
There are two common tax reliefs used when exiting a business, being Retirement Relief and Revised Entrepreneurs’ Relief. The qualifying period for Retirement Relief is 10 years, so it should be part of the long term planning for business owners to ensure that they meet the criteria. Where a family business is run by a husband and wife, the reliefs can be availed of by both as long as they are both owners and meet the conditions. The asset portfolio of a business can also impact retirement relief.
We would recommend that all entrepreneurs consider their exit plan as early as possible. If the individual is expecting to realise significantly more than the reliefs allow, then alternate strategies may have to be considered or they could end up losing 33% of the their retirement fund in CGT.
Tax free lump sums can be paid to exiting employees, including company directors, and can be a nice supplement to retirement planning. Consideration should therefore be given to the cash reserves in the company to fund a termination payment.
Pension funding is often the first piece of planning that tax professionals learn. Funding through a corporate pension scheme is more attractive than through a personal pension plan. Tax free lump sums can be taken from pensions and it is also possible to receive certain pension payments tax free where an individual becomes non-resident. There are different pension products available and each have different rules attached. We would recommend a review of all pension funds for our clients approaching retirement to ensure that their products are appropriate for them.
An important part of any retirement plan is who is going to take over the business. If there is a sale to a third party, how should that be structured? As a once off payment or with an earn-out? Would there be a handover period and how long would this be expected to extend?
If there is no third party sale would the business be liquidated and how could value be recognised? If the sale is within the family to the next generation, does the client want to receive full value for the business or would there be a gift element? Does the client want to retain a shareholding or control in the short-term until they’re sure the business is in safe hands? If the client is seeking to extract value from the business but pass it to the next generation, how can this be achieved without burdening them with debt? In a sale to a related party how should the business be valued? Identifying a successor and ensuring that the appropriate structure is in place to facilitate that handover is essential planning.
Asset protection is a key business component once value has been created. This is particularly important where a client is approaching retirement age. Limited liability protects an individual’s assets from the company’s liabilities, but the business assets of the company are still at risk. This can be mitigated but has to be managed carefully. Protecting what you have built up to date should be of paramount importance to clients approaching retirement.