Can I write development work off?

dvdfan

I worked for a US company (working remotely from Ireland), they basically pay me as a consultant/freelancer so I am classed as self-employed (sole trader) and I pay my own taxes at the end of the year.

As a side project, I started a software company. I spent approx €18,000 on a developer during 2016. He was not based in Ireland and working as a freelancer but I used upwork.com (biggest freelance site in the world) so I have all the records/invoices but I wasn't paying vat, prsi etc as he was not an employee.

The software company was and is still pre-revenue. I only recently converted to a limited company and stopped working for the US company end of 2016 so for all of 2016 I was registered as a sole trader. My earnings with the US company was €25,000.

Now I had two discussions earlier in the year with accountants. One never mentioned anything about the possibility of writing off the €18,000 I spent on development, the other accountant said I could write off the €18,000 against my tax and seemed pretty confident about it.

Is that true and assuming I have no other earnings how would out the amount that is taxable so I can roughly work it out. I have booked an appointment with an accountant but since I have had 2 different people tell me it was and wasn't possible to write it off I want to hear from others so I can at least know in advance.

If there are accountants reading this I am also open to you contacting me offering your services. Since I am now a limited company and just recently filled for VAT I will need help on that also. I work between Westmeath and Roscommon so if you are not in that locality we would need to be able to have discussions via Skype/Phone to reduce the amount of time I would have to travel.

thegolfer

From reading this, the side project is self-contained in the company, development of a product\asset at €18,000.

So long that there are Revenues forthcoming from this project then yes you can write off these against future income of the company.

You have probably developed an Intangible Asset and can be written off against future income of the company.

Capital allowances are allowed for these types of Assets at rates different to normal writing down allowances.
You could set the rate at 33%, whereas normal rates are 12.5%, ie write off over 3 years versus 8 years.

Depending on the development and type of project the R&D tax credit 25%, is an outside possibility.
Here you can claim back Corporation tax paid, give credits to specified employees.

You capitalise the development costs and write off other expenses through the P&L as pre-trading expenditure.

VAT you can also claim back as you are a start-up, generally, three years in advance of trading is permitted.

Also, as a new start-up company and a corporation tax exemption is a possibility, depending on the nature of the company.

dvdfan

Thanks a million. To make sure I understand are you saying I could write off 33% of the 18,000 this year, another 33% next year and also the year after?

So €18,000 * 33% = €5,940

So earnings of €25,000 - €5,940 so I would only be taxed on €19,060. If so according to a calculator I tried that would be €1,517.86 payable instead of €3,240.46 at the €25,000 rate.

Is the 33% negotiable? My 2017 income will be less so it would be ideal to say write off 50% this year and 50% next year, is there a max on that? That would bring my tax down to only a couple of hundred.

Did not know I could recoup v.a.t going back 3 years. I dont think I can claim v.a.t on the development costs or can I? I would say 80-90% of my costs were development. I also spent circa €3,200 in 2015 on development but I figured I can only claim back on 2016 for tax since this is the 2016 financial year I am settling

thegolfer

Probably best to clarify a few things.

Is the development cost in the company that you already have?

You stated that "As a side project, I started a software company. I spent approx €18,000 on a developer during 2016", is this a company or have you called it a company when in fact it is you who has incurred the cost as a sole trader?

The ability to write off the development I have referred to is on the basis that it is in the company you started originally. If not then there is a change in approach.

The provisions for capital allowances referred to apply to companies and not individuals.

VAT registration is permitted in a pre-trading scenario generally three years in advance of trading, however, backdating is not allowed, ie register today and claim for the next three years up to the date of trading, you have the intention to trade in three years.

Would I be right in saying that the intention is to develop a product, which will yield income in the future? If so the provisions are mainly aimed at companies, and the development cost would be capitalised, at the point of trading allowances kick in and written off.

If you are developing the product with a view to an immediate sale, then it would be recognised possibly as stock in trade\work in progress, which would be reflected in the P&L as stock\WIP, again not getting an immediate tax deduction, but only if and when the product is sold.

If the product can't be sold and has diminished in value then and only then could a deduction be taken as a deduction.

dvdfan

I will try and explain it better.

I worked for a U.S company so I set up a sole trader account and I used this solely for putting the wages into so I could track my wages at the end of the year for tax purposes.

I had also been working on the side project, it was going since 2015, I hadn't registered it as a company, just registered a website and I was using my wages to fund the business. So to answer your question, I guess it wasn't a company until a month ago or so when I registered it as a limited company. I was funded by an enterprise Ireland grant (non-taxable) through enterprise Ireland in 2016 (only makes up a small portion of the €18,000 as most of it was paid in 2017) and began working full-time on it since around Sept 2016. Even when working full time it wasn't a registered company as in registered with the CRO, the funding was put into my sole trader account which I was using for the US company so I was sharing it across the freelance job and the side business.

The product is developed and in beta, I expect to be trading within a month. My main aim was to reduce my tax bill due in October but it sounds like in my current situation that would not be possible?

thegolfer

Okay, that clarifies the position.

The trade being the project is in pre-trading position, thus any expenses cannot be offset to other incomes, additionally as the development project and asset created is technically not in use, no capital allowances are available yet, as you have yet to commence trading.

You have now incorporated the business, and the company now has the asset, however still in a pre-trading position.

If possible I would delay trading as the company, and possibly at least trade as a sole trader under the project for while.

Why?

Pretrading expenses become allowable on your first day of trading, however, you have yet to commence trade.

The pre-trading expenses would create a loss on day one and are carried forward in your name however on incorporation no losses are transferrable between you and the company.

The asset can be transferred to the company no issues, however, there is the possibility that some expenses have been lost in your name, relative to the project.

Transferring a trade to a company, for tax purposes is the cessation of that trade in your name, and the commencement in the company.

In your name, terminal loss relief is available for the cessation and losses sustained can be offset against your income for the year of cessation, and last three years.

In respect of 2016, as there is no other income for 2017, there may be the possibility of some loss relief for 2016, being the terminal loss relief from 2017 being carried back to 2016.

I would assess the expenditure to date and evaluate where you stand.

dvdfan

Super, thanks for clarifying and taking the time to explain in detail. Very much appreciated