Close company surcharge.

businessdit

Can someone please explain what the close company surcharge is?

If I have a company that makes 100,000 profit do I have to pay a tax on this cash that is left in the company in the next year of trading?

Thanks
Alan

Calahonda52

Profit and cash are not necessarily the same thing
The correct terminology is important as will be seen below.
You have I assume, read the Revenue document in this?

....440 Surcharge on undistributed investment and estate income
Summary
This section provides for an additional charge of corporation tax (referred to as a ―surcharge‖) on close companies at the rate of 20 per cent of the excess of the aggregate of the distributable investment income and the distributable estate income over the distributions made for an accounting period. There is no surcharge where the excess is €2,000 ....
....441 Surcharge on undistributed income of service companies
Summary
This section is designed to counter avoidance of tax arising from the diversion into close companies of income (usually arising from professional activities) which would otherwise attract income tax at the higher rate. ..... The section counters this method of tax avoidance by imposing a surcharge of 15 per cent on 50 per cent of the company‘s undistributed professional and service income and a surcharge of 20 per cent on the company‘s undistributed investment and estate income.


The short answer is if you have undistributed distributable income.
It is due by the filing date for the following year's accounts, assuming a 12 month accounting period and a going concern entity.
Crucially, losses in the following accounting year cannot be used to reduce the hit.

businessdit

Calahonda52 wrote: »

Profit and cash are not necessarily the same thing
The correct terminology is important as will be seen below.
You have I assume, read the Revenue document in this?

....440 Surcharge on undistributed investment and estate income
Summary
This section provides for an additional charge of corporation tax (referred to as a ―surcharge‖) on close companies at the rate of 20 per cent of the excess of the aggregate of the distributable investment income and the distributable estate income over the distributions made for an accounting period. There is no surcharge where the excess is €2,000 ....
....441 Surcharge on undistributed income of service companies
Summary
This section is designed to counter avoidance of tax arising from the diversion into close companies of income (usually arising from professional activities) which would otherwise attract income tax at the higher rate. ..... The section counters this method of tax avoidance by imposing a surcharge of 15 per cent on 50 per cent of the company‘s undistributed professional and service income and a surcharge of 20 per cent on the company‘s undistributed investment and estate income.


The short answer is if you have undistributed distributable income.
It is due by the filing date for the following year's accounts, assuming a 12 month accounting period and a going concern entity.
Crucially, losses in the following accounting year cannot be used to reduce the hit.

OK thanks for the info.
Does this apply to all companies?

I always thought the idea of a company was that you could build a base of cash for future capital investment?

So If I have close to 100k in the bank by end of year I will have to pay corp tax of 12.5% on that and then a further 20% tax on the sum after corp tax is taken?

Calahonda52

Only Close companies which are primarily tax avoidance/deferral instruments.
The reality on the tax take is yes:
1000 pre tax
875 net
700 after surcharge of 20%
350, or less, after personal tax and USC if at top rate
So 350 out of 1,000 is about the same as what would have happened to the guys who first set up these close companies if they stuck with PAYE.

In many cases it makes sense to pay the one off surcharge.
Am not going to teach you how to suck eggs, at Easter especially, but most close companies pay close to no tax/surcharge either through full on legitimate expenses or balance sheet management.

ps
Barney below has highlighted the distinct between trading and other income

srsly78

Yeah the really obvious way to avoid this is to not make a profit.

barneystinson

businessdit wrote: »

OK thanks for the info.
Does this apply to all companies?

I always thought the idea of a company was that you could build a base of cash for future capital investment?

So If I have close to 100k in the bank by end of year I will have to pay corp tax of 12.5% on that and then a further 20% tax on the sum after corp tax is taken?

The section 440 surcharge applies to undistributed investment / rental income - its purpose is to make it less attractive for people incorporating to reduce the rate of tax on passive income. It doesn't apply to income from trading. So if you are trading and building up a reserve of cash profit for capital investment, the surcharge would only apply to the interest earned on that cash pile.

The section 441 surcharge applies to companies engaged in professions and the first page or so of this link sets out fairly succinctly the rationale for it and the type of business covered. http://www.revenue.ie/en/about/foi/s16/income-tax-capital-gains-tax-corporation-tax/part-13/13-02-06.pdf