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Understanding tax for small businesses: What you need to know

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Understanding tax for small businesses can be complicated and overwhelming. But it is a necessary part of doing business.

In this article, we outline some of the main tax implications that you need to consider for your small business.

Choosing the right structure for your small business

First things first. You should think carefully about what ownership structure is most suited to your business. The structure you choose will have a bearing on everything about your business, from day-to-day operations to taxes and how much of your personal assets are at risk.

The key is to choose a business structure that gives you the right balance of legal protections and benefits.

The three main options are:

  • Sole trader
  • Partnership
  • Limited liability company

A sole trader or partnership structure is a good choice for a low-risk business, whereas a limited liability company protects your personal assets from liability, and if the company should become insolvent, it is generally only the company assets that will be used to clear debts.

On the downside, a limited liability company comes with more onerous reporting requirements.

In terms of tax liability, if you’re a sole trader or in a partnership, you pay tax under the self-assessment system. Whereas a limited company is liable for corporation tax.

Does your business have to be audited?

One requirement that your business may have to adhere to is an annual audit. The process can be expensive and time-consuming, particularly for smaller companies, which are required to adhere to similar audit rigours as their larger counterparts, but with a lot less resources.

However, this has recently been recognised and a change in legislation has meant that fewer companies are now required to have an audit.

As Liam Power, owner of accountancy practice Duggan & Power explains, the Companies Act 2017 introduced the micro company, which in the majority of cases are exempt from an audit.

In addition, if you have a micro company, you do not have to submit a director’s report or disclose directors’ remuneration and you can also file abridged financial statements with the Companies Registration Office. The Act also made it easier for small and medium companies to avoid an audit.

As it now stands, a company qualifies for an audit exemption if it satisfies any two of the following conditions, in the current financial year and the financial year immediately preceding that year:

Micro business

  • Turnover of €700,000 or less per year
  • Balance sheet of €300,000 or less
  • Have a maximum of 10 employees

Small business

  • Turnover of €12m or less per year (up from the previous threshold of €8.8m)
  • Balance sheet of €6m or less (up from the previous threshold of €4.4m)
  • Have a maximum of 50 employees

Medium business

  • Turnover of €40m or less per year (up from the previous threshold of €20m)
  • Balance sheet of €20m or less (up from the previous threshold of €10m)
  • Have a maximum of 250 employees

This is a real positive for smaller businesses. “More and more companies are now falling into audit exemption, which reduces the increased administration cost and burden on the directors of the company,” says Power.

“Financial institutions now rely on audit-exempt financial statements when providing funding to small companies.”

How does VAT for small businesses work?

Value Added Tax (VAT) can be another quagmire for small businesses and can be complex. Power outlines the basic principles: “VAT is charged on the goods and services a company sells to its customers, and it must pay VAT on the goods and services purchased from other business.

“The idea is that the VAT charged on sales is reduced by the VAT paid on purchases, and any balance is paid to Revenue.”

A company must register for VAT if the annual turnover exceeds or is likely to exceed the VAT thresholds. The thresholds are as follows:

  • €37,500 if supplying services only
  • €35,000 on the supply of mail order or distance sales in the State
  • €41,000 if purchasing goods from other EU Member States
  • €75,000 if supplying goods and also €75,000 for persons supplying both goods and services, where 90% of the turnover is derived from the supply of goods.

VAT returns are normally filed on a bi-monthly basis and are due on the 19th day of the month following the end of the VAT period. Power warns against late filing of returns, which he says can trigger a Revenue audit.

What tax reliefs are available for small businesses?

The government wants to encourage business ownership and entrepreneurship, and has put numerous initiatives in place to enable businesses to qualify for tax relief.

Some are easier to claim than others and there are different types of relief, with certain ones targeted towards innovation and others designed to help the unemployed start a new business. Power summarises the more common ones:

Start-up Companies Corporation Tax Relief

This relief was introduced to help generate employment and provides for a reduction on corporation tax for the first three years of trading and is linked to employer’s PRSI (Pay Related Social Insurance) paid by the company. The corporation tax liability must be €40,000 or less.

Also, as new startup businesses may be loss-making in the initial years, these companies are entitled to carry unused relief forward.

Jobsplus

Jobsplus is a relief that incentivises businesses to employ staff who have been unemployed for long periods. The employer is required to employ full-time staff, who should work no less than 30 hours a week.

The Department of Employment Affairs and Social Protection pays the incentive to the employer over a two-year period. The rates are paid at two levels of €7,500 and €10,000, depending on the circumstances of the employee.

In addition, Revenue also provides tax relief for investors and there are three main incentives:

  1. Employment Investment Incentive (EII) – this provides up to 40% income tax relief, over four years, for individuals who invest in qualifying companies. The maximum investment per investor is capped at €150,000 per year.
  2. Start-up Capital Incentive (SCI) – this is available to family members of existing shareholders. Again, the investor may claim up to 40% tax relief over four years.
  3. Start-up Refunds for Entrepreneurs (SURE) – this is designed to aid entrepreneurs who leave an employment and set up their own business. Again, depending on the size of the investment, individuals may be entitled to claim an income tax refund paid over the six years prior to the year the initial investment is made.

“The reliefs and incentives outlined above are valuable monetary reliefs and in our experience are not used enough,” Power adds. “Small companies should contact their accountants and tax advisers to explore the conditions required.”

Final thoughts on understanding tax for small businesses

There are many important issues to consider when it comes to understanding tax for small businesses. Sometimes paying for professional advice can be worth it and there are numerous smaller accountancy practices around the country that can give advice at a reasonable price.

Alternatively, there is ample free advice that you can avail of and a good initial point of contact can be your Local Enterprise Office.

How to start your business

Want to start your own business but not sure how to proceed? Read this guide for tips on creating a business plan, working out who your customers will be and much more.

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