Tax law: benefits of setting up a company, rather than being a PAYE employee?

Dostoevsky

A friend is an employee for a financial institution and on over €200,000. He's on an annual contract. For tax reasons, he went off and set up a company with his wife and himself as shareholders. On my PAYE salary I'm paying around 40% tax. What sort of tax liability would he have by creating a company rather than being paid as a PAYE employee?

Also, Marian Finucane, Pat Kenny and the other RTÉ people on contracts: do they get paid the profits from their firm, rather than a salary? If so, what is the respective tax rate on each?

hfallada

As a limited company you can write off more expenses. Also you only get taxed when your income leaves the business, as its a separate legal body from yourself. You are exempt from corporation tax for the first few years.

But the main advantage of having a limited company was keeping all the profits in the business. Then liquidating the business and only having to pay capital gains tax at 20% increase of paying income tax at 41%. Howeve capital gains tax is 33% at the moment and I'm pretty sure the government wants to increase it to 37%. You could hold out and hope its lowered in the future, but I wouldn't be optimistic. But capital gains tax was/ possible is still, quite an easy tax to avoid with a good tax consultant.

To be honest I don't know if the benefits of a business are that great anymore.

biddybops

I am somewhat confused by your question.
If your friend is employed by a company they are responsible for his tax.
If he is self employed and has only one client,ie he is a subcontractoe, he will still be seen as being an employee of that company, rct will be deducted.
The rules surrounding company formation are strict and your friend should take advise from legal and accounting professionals before he lands
himself in big trouble.!
There are many advantages to forming a ltd company but the requirements on a taxation level are onerous. And if you miss filing dates you will lose automatic exemption to a/c been audited.

You are not the company, you work for the company and will get a wage, just like everybody else.

Any profits are taxed at corporation rates, but when you take the money out it is taxed again, so it's not as wonderful as people think.
Your friend needs to have a good accountant to discuss these matters with, I can't advise that strongly enough!

Cody Pomeray

Simple question to answer

-Tax avoidance
-limited liability status for debts

bastions of wisdom like citizensinformation or a CSPE teacher somewhere will probably tell you that the downside is increased compliance costs. To which I would add LOL.

biddybops

Cody Pomeray wrote: »

Simple question to answer

-Tax avoidance
-limited liability status for debts

bastions of wisdom like citizensinformation or a CSPE teacher somewhere will probably tell you that the downside is increased compliance costs. To which I would add LOL.

If you are a solicitor you should be struck off for such comments.

Cody Pomeray

Biddy, I am simply commenting that there is a farcical situation in this country in respect of limited liability companies, and tax avoidance. Unless one is on an average-low wage, fears about compliance issues are totally overblown.

I am not a sympathiser for the way one man companies are abused. Faced with the arbitrary way that this jurisdiction deals with (panders to?) corporations as opposed to other legal personalities, there are few options but to "lol".

Rainblow

Dostoevsky wrote: »

A friend is an employee for a financial institution and on over €200,000. He's on an annual contract. For tax reasons, he went off and set up a company with his wife and himself as shareholders. On my PAYE salary I'm paying around 40% tax. What sort of tax liability would he have by creating a company rather than being paid as a PAYE employee?

Also, Marian Finucane, Pat Kenny and the other RTÉ people on contracts: do they get paid the profits from their firm, rather than a salary? If so, what is the respective tax rate on each?

The Revenue and Social Welfare have been examining these situations and if they deem it to be an employment situation rather than a sub-contract they will insist on collecting the full tax due.

The leading Irish authority in this area is the Supreme Court decision in Henry
Denny & Sons v Minister for Social Welfare.
37 Here, a worker was hired as in-house
demonstrator, demonstrating and marketing the company’s (Henry Denny & Sons)
products in supermarkets. She was placed on a panel from which demonstrators were
selected by the company. The demonstrator was employed by the company under
yearly renewable contracts from 1991 to 1993. Her written contract of employment for
1993 described her as an ‘‘independent contractor’’ and purported to make her
responsible for her own tax affairs. The demonstrator worked an average of 28 hours a
week for 48 to 50 weeks a year and carried out approximately 50 demonstrations a
year. The demonstrations were not carried out under the supervision of the company,
but the demonstrator was required to comply with any reasonable directions given by
34 See Regan, ‘‘The Contract and Relationship of Employment’’ in Employment Law (Regan ed,
Tottel, Dublin, 2009), pp 41-42.
35 [1968] 2 QB 497.
36 ibid at 515.
37 [1998] 1 IR 34.
[315]
[316]
[317]
Principles of Irish Employment Law
46the owner of the supermarket and she had been provided with written instructions as to
how she was to carry out her work. She was supplied by the company with the
materials for performing the demonstration (demonstration stand, uniform and
products) and required the consent of the company prior to sub-contracting any of
the demonstrations assigned to her. She was not a member of the company’s pension
scheme.
In 1992 both parties were required to fill out a form to determine whether she
was an insurable person under the Social Welfare Acts 1993-1997 (if her contract was
one of service she would be insurable). The social welfare officer decided she was an
insurable person. The company appealed this decision and the appeals officer rejected
the appeal. The company then appealed to High Court, where Carroll J also held that
the worker was an insurable person. The company then appealed to Supreme Court.
Keane J dismissed the appeal. He referred to the the English decision ofMarket
Investigations v Minister of Social Security,
38 where Cooke J noted that it was likely
that no exhaustive list could be compiled of considerations which are relevant in
determining the question of whether a person is, or is not, on business on his or her
own account and nor could strict rules be laid down as to the relative weight which the
various considerations should carry in particular cases. Keane J concluded that:
‘‘while each case must be determined in the light of its particular facts and
circumstances, in general a person will be regarded as providing his or her
services under a contract of service and not as an independent contractor where
he or she is performing those services for another person and not for himself or
herself. The degree of control exercised over how the work is to be performed,
although a factor to be taken into account, is not decisive. The inference that
the person is engaged in business on his or her own account can be more readily
drawn where he or she provides the necessary premises or equipment or some
other form of investment, where he or she employs others to assist in the
business and where the profit which he or she derives from the business is
dependent on the efficiency with which it is conducted by him or her’’.
39

biddybops

Cody,

No, my bad for reacting so badly to a comment.
Just a few pointers.
Most small businesses incorporate because of threats of being sued by exemployees or companies that find it cheaper to send a solicitors letter, complaining about work that was done, than it is to pay their bill.
It has got nothing to do with debt avoidance.
Regardless of whether your turnover is €200k or €2000,000 you still have the same filing returns to complete and yes, this is time consuming.

P.S. I am not a teacher!

Cody Pomeray

I am sorry if my previous point came across as dismissive, it wasn't a response to your point, which I hadn't fully read.

Nevertheless I have to disagree that fear of litigation is the reason individuals (effectively) incorporate themselves.

I have acquaintances who graduated in the last 2 years, went off and set up companies that they treated like Transition Year experiments, and literally walked away from debts and wage obligations. I have sat around too many pub tables with these people, listening to them sh1ting on about how they at least got off their arse and did something, when in fact there are enormous gains to be had and, in these cases, practically no risks.

A clearer example (although a less common example) are your Pat Kennys and Marian Finucanes - they are not in this for fear of litigation, they're an example of another type of people who establish these legal personalities to avoid tax, just like the OP's friend.

Compare this to your low paid worker or the sole trader (and barrister!) whose wages are so low that they cannot avail of these arbitrary and ridiculous corporate loopholes, or are prevented from incorporating by other legal barriers.

There are plenty of legitimate 'one man companies' out there, but even the legit ones are mainly incorporating to protect themselves from liability and to avoid tax (I'm not saying they are evading tax).

Dostoevsky

biddybops wrote: »

I am somewhat confused by your question. If your friend is employed by a company they are responsible for his tax. If he is self employed and has only one client,ie he is a subcontractoe, he will still be seen as being an employee of that company, rct will be deducted.

He works for a single financial institution. I would describe him as an employee of that company because of that, but I surmise from your request for clarification that technically that description may be incorrect as he is on a contract where his very large salary is paid into a company which he set up entirely for the purposes of limiting his tax liability to the state. His situation seems, to me, to be analogous to Marian Finucane et al, whom I would describe as employees of RTÉ but who have established companies for tax avoidance reasons. Technically, I now gather each of these people are employees of their respective company rather than the financial institution or broadcaster involved?

Yesterday I was told of a relative (albeit in the States) who set up a company and paid themselves a very small salary. Their main income was in profits from the company because the tax is much lower on profits than it is on a salary. Can this happen in Irish law also? If so, what are the corresponding tax rates on profits (dividends?), as opposed to the 40% plus on salary?

In all the above cases, then, is the principal reason for people setting up companies because by being paid profits rather than a salary they will pay a lot less tax? (I get the writing off of expenses as another principal reason)

biddybops wrote: »

You are not the company, you work for the company and will get a wage, just like everybody else.

As above, however, they can rig it so they get a very small wage but a large dividend when he is paid (I assume from my US story that tax on dividends/profits is far lower than on a PAYE salary in Ireland)

biddybops wrote: »

Any profits are taxed at corporation rates, but when you take the money out it is taxed again, so it's not as wonderful as people think.

Interesting. So, perhaps 12% corporation tax plus the dividend tax? (less all the write-offs for expenses) As opposed to c. 45% tax as a PAYE employee (with no expenses really/ less some small tax credits)?

biddybops

I have given some thought to your comments as I never really gave any great consideration to the matter before.

1. It is far too easy to set up a company, perhaps you should have a record of being a sole trader for say, a period of 5-10 years before being allowed to incorporate- earning your stripes so to speak.

2. Your friends sound young and foolish, something that is forgivable, we have all being young and did stupid things, but we live and learn.
Revenue has a long memory though and is not so forgiving!

3. I didn't incorporate to avoid tax or to avail of complicated tax incentives, it was done as we were expanding and it seemed to be the next logical step.

4.i don't have any problem paying taxes as I had to avail of state benefits many moons ago and I am 'realigning the scales' so to speak.
I would like to be able to say that it is important that people do pay taxes so as to pay for the services provided for by the state, but I won't, take from that what you may.

Just as a matter of interest why are some individuals not allowed incorporate?

RainyDay

Dostoevsky wrote: »

He works for a single financial institution. I would describe him as an employee of that company because of that, but I surmise from your request for clarification that technically that description may be incorrect as he is on a contract where his very large salary is paid into a company which he set up entirely for the purposes of limiting his tax liability to the state.

His arrangement risks falling foul of Revenue's general anti-avoidance measures, see Section 811 of the Taxes Consolidation Act 1997.

Dostoevsky wrote: »

His situation seems, to me, to be analogous to Marian Finucane et al, whom I would describe as employees of RTÉ but who have established companies for tax avoidance reasons. Technically, I now gather each of these people are employees of their respective company rather than the financial institution or broadcaster involved?

Far be it from me to defend Marian et al, but at a minimum, they are likely to have considerable income from other sources, particularly public appearances etc.

Dostoevsky wrote: »

Yesterday I was told of a relative (albeit in the States) who set up a company and paid themselves a very small salary. Their main income was in profits from the company because the tax is much lower on profits than it is on a salary. Can this happen in Irish law also? If so, what are the corresponding tax rates on profits (dividends?), as opposed to the 40% plus on salary?

Dividends are taxable as income in Ireland, same as salary.

hfallada

Cody Pomeray wrote: »

I am sorry if my previous point came across as dismissive, it wasn't a response to your point, which I hadn't fully read.

Nevertheless I have to disagree that fear of litigation is the reason individuals (effectively) incorporate themselves.

I have acquaintances who graduated in the last 2 years, went off and set up companies that they treated like Transition Year experiments, and literally walked away from debts and wage obligations. I have sat around too many pub tables with these people, listening to them sh1ting on about how they at least got off their arse and did something, when in fact there are enormous gains to be had and, in these cases, practically no risks.

A clearer example (although a less common example) are your Pat Kennys and Marian Finucanes - they are not in this for fear of litigation, they're an example of another type of people who establish these legal personalities to avoid tax, just like the OP's friend.

Compare this to your low paid worker or the sole trader (and barrister!) whose wages are so low that they cannot avail of these arbitrary and ridiculous corporate loopholes, or are prevented from incorporating by other legal barriers.

There are plenty of legitimate 'one man companies' out there, but even the legit ones are mainly incorporating to protect themselves from liability and to avoid tax (I'm not saying they are evading tax).

A limited company costs €300 including VAT to set up. They arent something for the mega-rich. I have no problem with a business person avoiding tax. People in this country are in education for over 20 years to get taxed at up to 53%. While tens of thousands of people never contribute a cent in income taxes or PRSI to the tax payer. Yet they both get the same pension. The irish tax system is too progressive. Something like the top 10% pay 70% of income taxes and if someone wants to lower their tax liability, I have no problem with it.

Cody Pomeray

hfallada wrote: »

A limited company costs €300 including VAT to set up. They arent something for the mega-rich.

The barrier for the less well off is not the cost of setting the thing up. The barrier exists in the fact that the worker would usually have to demonstrate some managerial level of control over the work he executes as a sub-contractor in the workplace, and so your average PAYE worker is pretty much automatically excluded. I think we may all accept your average postman would be given short shrift by the revenue for any such application.

I have no problem with a business person avoiding tax. People in this country are in education for over 20 years to get taxed at up to 53%.

Oh not this again. Please don't confuse the marginal rate of tax with the effective overall rate, which is a far more useful figure. An alien landed from Sweden would be liable to imagine that we are slashing overall salaries by more than half. In fact, effective income tax rates rarely venture above the mid 20s.

RainyDay

hfallada wrote: »

People in this country are in education for over 20 years to get taxed at up to 53%. While tens of thousands of people never contribute a cent in income taxes or PRSI to the tax payer. Yet they both get the same pension. The irish tax system is too progressive. Something like the top 10% pay 70% of income taxes and if someone wants to lower their tax liability, I have no problem with it.

Why the obsession with the narrow focus on income tax? It is just one of the State's taxes, and is not always the lion's share of tax income. Why don't you look at who pays ALL taxes, including VAT, custom & excise duties, along with income tax?