This month the motor industry has reported a 30% increase in new car sales for the year to date. This return to growth is a positive sign for the operators in this industry. With growth comes an increase in profits levels and an increase in the value attributed to the business. As a result, for those in the motor trade, there are a number of tax related areas that are worth consideration at this juncture. These include:
- capital investment;
- managing succession effectively; and
- tax compliance revisited.
Generally, in a growth driven market, businesses will increase their capital spend on their premises and infrastructure in order to service customer demand more efficiently. It is therefore important to consider how this growth will be funded and the tax deductions available for the expenditure incurred.
Any type of debt funding, be it bank funding or third party debt, will generally incur some level of interest cost. It is important that a tax deduction can be claimed for this interest cost against business profits. Therefore, how and where within the corporate structure the debt is drawn down will impact if this cost can be claimed in a timely manner.
Also, in regard to third party debt, non-bank funded, the drafting of legal agreements is important to ensure the funding is debt related rather than a quasi-equity arrangement where the nature of the annual cost may not be considered deductible for taxes.
In regard to expenditure incurred to improve or expand the business premises, from a management cashflow perspective, one must factor in how and when a tax deduction can be claimed for the associated costs.
Generally in relation to this type of expenditure there are four categories to consider:
- repair costs;
- moveable plant and machinery;
- integrated plant and machinery; and
- non-qualifying capital expenditure.
Where the expenditure incurred for business purposes is a repair in nature, then a full deduction is obtained against taxable profits in the period in which the expenditure is incurred. This distinguishes revenue expenditure from capital expenditure.
Categories 2 – 4 above relate to capital expenditure. Expenditure is classified as capital when it gives rise to a commercial benefit which endures well beyond the accounting period in which it is initially incurred. Capital items must qualify for capital allowances as plant and machinery in order to be tax deductible. A tax deduction for the cost of such items is allowed at 12.5% per annum over an eight year period. Certain energy efficient plant and machinery that is approved by Sustainable Energy Ireland (SEI) can qualify for a 100% allowance in year 1.
Moveable plant and machinery includes items which are purchased that can physically be moved. For example desks and chairs, machinery, computer equipment. Integrated plant and machinery can be more difficult to identify and would include items which have a function in the business. For example lift systems, air condition systems, specialist wiring or piping needed for other items to function.
There can be real value in identifying items of integrated capital expenditure that qualify for capital allowances, as well as assessing whether any capital items to be purchased could qualify under the SEI approved scheme.
In order for a business to continue to be viable there needs to be a clear succession plan in place. This may involve planning for succession of the business to family members or alternatively planning for succession/disposal of the business to third party management.
There are many options available regarding how best to transition over the business to its successors. Third party management, interested in becoming shareholders, can either purchase shares from the existing shareholders or be issued with new shares by the company. The tax implications for all parties involved, as well as the funding capacity, are all factors that need to be considered.
For existing shareholders disposing of shareholdings during their lifetime the main tax consideration is what Capital Gains Tax (CGT) liabilities could occur. The current CGT rate is 33% on net gains. Retirement relief is a relief from CGT available on the disposal of qualifying business assets by individuals who are at least 55 years old.
The individual disposing of their shares needs to have held the assets for a period of at least ten years and satisfy certain other conditions. If the disposal takes place to a third party before the person is 66 years the relief is limited to €750,000, for those over 66 years of age, the limit is reduced €500,000.
In regard to disposals to family members, an upper limit of €3m applies where the individual is aged 66 years and over but no limit applies prior to age 66 years. Where the existing shareholder transfers their shares by way of gift to a connected person and receives no consideration for the transfer, a charge to CGT may still arise as the person disposing of the shares will be deemed to receive proceeds equal to the market value of the shares.
For individuals receiving a gift of shares from existing shareholders business relief may be available if certain conditions are satisfied. This relief provides for a 90% reduction in the market value of the business assets passing. Capital acquisition tax at 33% would then be payable by the recipient on the remainder, subject to certain tax free thresholds which are dependent on the relationship between the parties.
A succession plan that is thought out and well planned will ensure an effective and efficient hand over of the business for all parties involved.
Tax compliance revisited
The increased revenue growth for companies in the sector, is likely to lead to increased profits and hence renewed focus will need to be placed on managing the company’s tax liabilities and cashflow at the relevant payment dates. Preliminary corporation tax obligations vary depending on whether the company is considered a ‘small’ or ‘large’ company for corporation tax purposes.
A small company for tax purposes is one whose prior-period final corporation tax liability did not exceed €200,000. Preliminary tax for ‘small’ companies is due no later than the 23rd day of the month preceding the end of the accounting period. The payment may be the lower of:
- 100% of the prior-period final corporation tax liability;or
- 90% of the estimated current-period final corporation tax liability.
By way of example, for a company with year-end 31 December 2015, the preliminary tax payment would be due by 23 November 2015. The balance of corporation tax is due, with the filing of the corporation tax return, no later than the 23rd day of the ninth month following the end of the accounting period i.e. 23 September 2016.
A ‘large’ company for tax purposes is one whose prior-period final corporation tax liability exceeded €200,000. For companies in this category, preliminary tax is paid in two accelerated instalments which increase the cashflow burden for businesses. The first preliminary tax payment is due no later than the 23rd day of the sixth month from the start of the accounting period. The payment may be the lower of:
- 50% of the prior-period2 final corporation tax liability; or
- 45% of the current-period estimated final corporation tax liability.
The second preliminary tax payment is due no later than the 23rd of the month preceding the end of the accounting period. Such payment must bring the total preliminary tax payment on account to a minimum of 90% of the tax payable for the current accounting period. By way of example, for a company with year-end 31 December 2015, the first payment (50/45%) would have been due by 23 June 2015 and the second payment (balance up to 90%) due by 23 November 2015. The final balance of corporation tax is due as for small companies above.
Recent changes in tax legislation have introduced the requirement for certain companies to file financial statements in inline eXtensible Business Reporting Language (iXBRL) in addition to their corporation tax return with the Revenue Commissioners. iXBRL is a language which allows financial information to be communicated and presented in a format that may be recognised and read by both people and computers. This effectively means the Revenue Commissioners can more easily review and interrogate the company’s financial data. This requirement is being introduced on a phased basis.
From 1 October 2014, it will be mandatory for all companies who do not met the exemption criteria (must meet all three to be excluded) below to file:
- the balance sheet total of the company does not exceed €4.4 million;
- the amount of the turnover of the company does not exceed €8.8 million; and
- the average number of persons employed by the company does not exceed 50.
The meaning of balance sheet total in point 1 above had previously given rise to some confusion as to whether this referred to “total net assets" or "aggregate of assets without deduction of liabilities".
As a transitional measure up to 31 October 2015, companies may apply either basis when determining if they are excluded from mandatory iXBRL filing. From 1 November 2015, the "aggregate of assets without deduction of liabilities" is the only test that should be applied when considering if the balance sheet total of the company does not exceed €4.4m. This may give some businesses an opportunity to file their corporation tax returns early in order to avoid mandatory iXBRL filing for the current year.
The above commentary merely acts as a general overview. Independent professional advice should always be sought in advance of any transactions. Grant Thornton takes no responsibility for any liability for any loss occasioned to any person acting or refraining from acting as a result of the above information.