Tax implications of sole trading vs Ltd. company

I've read some of the useful links on the page about taxes but just want to ask one specific thing to make sure I understand correctly.

I'm going freelance next year. If I registered as a sole trader, I would pay tax on 2013 income in October 2014 - is that right?

And if I set up a limited company I would get a 'tax holiday' for three years on the corporation tax. So I'd pay myself a reasonable salary - on which I'd pay income tax - but could use some profits in the meantime as tax on that wouldn't fall due until 2016?

Basically I need access to some cash in the first year or so and, given that bank loans are a pain, wonder whether incorporating might be the best way to defer some tax payments.

AnthonyCasey

Hi @ixelles
Two issues to be aware of:
• Whilst you do not have to pay your 2013 Income tax until October 2014 you will also be required to pay your preliminary tax for 2014 on the same date. You need to make sure you are putting away sufficient taxes to meet both tax liabilities.
• Just because you do not have to pay Corporation Tax on your profits for the first 3 years trade in a limited company does not mean you will personally have access to the profits without suffering income tax. Remember any monies paid by the company to you or on your behalf will be liable to Income tax regardless of the Corporation tax exemption.
Have a look at http://www.noonecasey.ie/guide-to-irish-tax/income-tax for more detail on the above.

AnthonyCasey

AnthonyCasey wrote: »

Hi @ixelles
Two issues to be aware of:
• Whilst you do not have to pay your 2013 Income tax until October 2014 you will also be required to pay your preliminary tax for 2014 on the same date. You need to make sure you are putting away sufficient taxes to meet both tax liabilities.
• Just because you do not have to pay Corporation Tax on your profits for the first 3 years trade in a limited company does not mean you will personally have access to the profits without suffering income tax. Remember any monies paid by the company to you or on your behalf will be liable to Income tax regardless of the Corporation tax exemption.
Have a look at http://www.noonecasey.ie/guide-to-irish-tax/income-tax for more detail on the above.

Thanks Anthony,
That's very useful. Perhaps life would be simpler as a sole trader given what you point out about not being able to do much with company profits unless paid as taxable salary.

Just to be clear - and apologies for being a bit of a novice on this - if I start working for myself in (let's say) Q2 2013, I would pay 2013 tax in October 2014, plus an estimate of my 2014 income in October 2014?

I might give you a call in a month or two when I get serious about this.

AnthonyCasey

Deleted User wrote: »

Just to be clear - and apologies for being a bit of a novice on this - if I start working for myself in (let's say) Q2 2013, I would pay 2013 tax in October 2014, plus an estimate of my 2014 income in October 2014?

You are correct; there are certain start up provisions to be taken into account when calculating the taxes payable, however the basic concept is 2013 taxes plus 2014 Preliminary tax are payable on 31 October 2014.

Sinfonia

Sorry to jump in with something else, but it is related:

I'm soon to be paid for a freelance job; I'm not registered for self-assessment or anything - my usual income is under PAYE.
Here's the situation I'm wondering about:
1) If I'm paid this money in 2012, do I only need to register for self-assessment and pay tax by 31 Oct 2013?
2) If I move abroad in early 2013 (which I intend to do), what effect will that have on the situation (i.e. if I'm not resident in Ireland by the time the tax is due to be paid)?

AnthonyCasey

Sinfonia wrote: »

Here's the situation I'm wondering about:
1) If I'm paid this money in 2012, do I only need to register for self-assessment and pay tax by 31 Oct 2013?
2) If I move abroad in early 2013 (which I intend to do), what effect will that have on the situation (i.e. if I'm not resident in Ireland by the time the tax is due to be paid)?

Hi Sinfonia,
you are liable to tax on your earnings in the period in which earned regardless of payment date. On that basis if the work is done in 2012, you will be liable for tax on that income in 2012. This will be payable in October 2013. Moving abroad in 2013 does not remove the requirement to declare your 2012 earnings.

Sinfonia

AnthonyCasey wrote: »

Hi Sinfonia,
you are liable to tax on your earnings in the period in which earned regardless of payment date. On that basis if the work is done in 2012, you will be liable for tax on that income in 2012. This will be payable in October 2013. Moving abroad in 2013 does not remove the requirement to declare your 2012 earnings.

Thanks Anthony, so I don't need to register for self-assessment and file a return for October 2012 then.
The only other thing is that I'm not sure whether or not I should be charging VAT - I'm basically selling the usage rights for a piece of music to an advertising company in England..

AnthonyCasey

You do need to register as self employed in 2012 however you do not need to file a return until October 2013.
Did you write the piece of music yourself? If so, have you claimed Artist Exemption? This will allow you earn up to €40,000 pa publishing income without any Income tax liability.

Sinfonia

AnthonyCasey wrote: »

You do need to register as self employed in 2012 however you do not need to file a return until October 2013.

Ah, okay.

AnthonyCasey wrote:

Did you write the piece of music yourself? If so, have you claimed Artist Exemption? This will allow you earn up to €40,000 pa publishing income without any Income tax liability.

I did write it, however under the Artists Exemption Guidelines they exclude music written for advertising purposes:

revenue.ie wrote:

10. Exclusions from the compass of "original and creative"
[...]
c. A Musical Composition
Types or kinds of musical compositions written for advertising purposes which do not exist independently in their own right by reason of quality or duration.

http://www.revenue.ie/en/tax/it/reliefs/artists-exemption.html

AnthonyCasey

The question then Sinfonia is did you write the piece as a standalone piece of work which you are now trying to sell for advertising purposes or did you write it specifically for advertising purposes?

Sinfonia

AnthonyCasey wrote: »

The question then Sinfonia is did you write the piece as a standalone piece of work which you are now trying to sell for advertising purposes or did you write it specifically for advertising purposes?

Hmm, it's kind of in between:
There is an earlier larger/longer piece that I wrote for its own sake, which was never released in any way or anything.
I then rewrote and edited it under instruction of the company, so what they are buying the rights to is a one-minute piece which was effectively written for the sake of the advertisement..

AnthonyCasey

Taxable I am afraid!

Sinfonia

AnthonyCasey wrote: »

Taxable I am afraid!

So I thought!
And about the VAT thing, do I need to charge that?

AnthonyCasey

You only need to register for VAT if your turnover is in excess of €37,500 http://www.noonecasey.ie/guide-to-irish-tax/value-added-tax
Even if you are registered for VAT you may not need to charge it in this case as you are 'exporting' your service.

Sinfonia

AnthonyCasey wrote: »

You only need to register for VAT if your turnover is in excess of €37,500 http://www.noonecasey.ie/guide-to-irish-tax/value-added-tax
Even if you are registered for VAT you may not need to charge it in this case as you are 'exporting' your service.

Ok. Expected turnover wouldn't reach that.. I had initially thought that VAT may alleviate the income tax liability, but I think I'm wrong on that..
So I guess I'll just invoice them without VAT, then register for self-assessment, and pay the tax next October?

Thanks so much for the advice