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Q: I’m a 50-50 shareholder in a small business which was set up just over three years ago. We’ve passed into profitability, which is excellent, but there’s one big problem – my partner simply isn’t pulling his weight, and it’s reached a totally unacceptable situation for me. I can safely say that I do the majority of the work and bring in at least 80% of the business, whereas he believes you can get rich without working hard – and we both draw the same amount of money from the firm. We don’t have a shareholder’s agreement in place, and he’ll probably be reluctant to sell his shares. What can I do? Is there anything I could do that would force a sale? If I left, would I then get in trouble for trying to contact former clients?

 

A: Your situation is, sadly, a common one, but we would urge you to be cautious. At the risk of sounding glib, everyone believes that they’re the ones carrying a greater burden in the workplace – for all you know, your partner has a grievances list as long as your own.

That’s why we’d recommend trying the optimum route first: resolving a damaged business relationship. While this isn’t easy, neither is splitting up a business, starting a new one, and avoiding any legal fallout. Only consider a split if you’ve exhausted all your options for repairing the relationship, addressing your issues with the workload of the business. It’s worth investing in some kind of professional arbitration if that’s required to have a genuine resolution – while you’re at it, you should get a shareholder’s agreement in place.

Failing that, you can go down the road of buying your partner out of the company. Don’t expect this to be particularly cheap, particularly if the firm has assets besides clients and a web presence – your partner will expect remuneration for his work setting up. If your partner is amenable to this, then you’ll find a previous Q&A we wrote on buying out a partner here. In these circumstances, you should probably get your partner to sign a non-compete agreement.

 

If you can’t repair your relationship, and your partner will not be bought out, then you’re looking at going solo – you’ll have to resign as a director, either hanging on to your shares in the firm or forfeiting them. You can do this by filing a Form B69 with the CRO. If the only directors are you and your partner, the company will have to nominate a second director to take your place.

As for contacting former clients, you’re on dicey ground, as the client list is the property of the company – not you. While you’re safe letting them know that you’re leaving the company to set up on your own, and where they can contact you, anything more aggressive than this will open you up to legal action. If you have contracts of employment outlining non-compete clauses (which I’m guessing is unlikely given the lack of a shareholder’s agreement) then you’d have to tread even more carefully.

You probably see now that this is extremely messy, and that your personal circumstances will take a hit if you walk away. Most business partnerships go through phases when one person feels they’re bringing more to the table, and would be better off going solo – the grass always being conceivably greener on the other side. But having seen how these situations typically play out, we’d recommend instigating a messy business split only as a last resort.

Declan Dolan

Accountants in Dublin – and all over Ireland – are still picking apart the pieces of the latest Finance Bill, and assessing its implications for business. As part of our ongoing series explaining the complex legislation, this week, we will be exploring the impact of the bill on business taxation.

 

Employment & Incentive Initiative (EII)

The bill legislates for the extension of the previously-introduced Employment Investment Incentice (EII). This tax scheme, which has replaced the Business Expansion Scheme, provides tax relief for investment in certain corporate trades. Investors in a company can gain relief on an investment of up to €10,000,000 in any one company or group of companies, or €2,500,000 in any twelve-month period. Individual investors, meanwhile, can obtain income tax relief on investments up to a maximum of €150,000 each year. Relief is given at an initial rate of 30%, while a further 11% relief is available when it’s proven either that employment levels have increased at the company over a three-year period, or that the company used the capital raised for research and development. The continuation of the scheme, of course, depends on approval from the European Commission. Hotels, guesthouses and self catering accommodation that meet the other criteria of EII will be allowed to qualify on a temporary basis – this will be reviewed after two years.

 

Improved Tax Credits

The Finance Bill also enhances the Research & Development (R&D) tax credit, increasing the eligible expenditure for the scheme from €100,000 to €200,000. The bill also reduced the amount of working time that the “key employee” covered by the scheme must spend on R&D from 75% to 50% in an effort to assist SMEs.

The bill extends the useful Corporation Tax exemption scheme for start-up companies, allowing any unused credit from the first three years of trading to be carried forward and used in subsequent years. This could be a major boon for firms that swing into profitability after a fallow start-up period, even though the relief is still capped to the amount of Employer PRSI paid in a year.

 

‘Unorthodox’ Companies

A new form of venture, Real Estate Investment Trusts, are being introduced in the legislation. these listed companies will be exempt from corporation tax on income and gains from rental investment property, provided the profits are distributed, in a bid to attract foreign investment to the property market.

Life has also become a bit easier for operators of close companies. Close companies can now retain €2,000 without giving rise to a close company surcharge, up from €635 under old regulations. This is designed to assist with the cash-flow of smaller ventures.

 

VAT

A few changes have been made to the VAT code that have relevance for some business people. The bill confirms VAT obligations for building or developed land transfers from the owner to the receiver for the period of their appointment. Also, the bill specifies that a receiver or liquidator will be the accountable person for VAT on supplies of taxable services – such as operating a hotel or making a taxable letting – that are made by the business.

More significantly, the cash receipts basis threshold for SMEs will rise to €1.25m (from €1m) from May 1 of this year. This small change will make a significant difference to many companies that may be experiencing growth, but aren’t in a cash-flow position to move away from paying VAT on a cash receipts basis.

 

As you can see, there’s no massive giveaway in the latest Finance Bill, but a few well thought out tweaks should make life easier for several entrepreneurs. If you want to ensure that you’re capitalising on positive changes in legislation, we’d recommend talking to us – we can set up an initial, no obligation consultation to find out about your business and its needs.

For most businesspeople, the most widely reported measures in December’s budget were either anticipated long ago (the property tax) or of little relevance to their companies (the cuts in carer’s allowances). However, now that the dust has settled and the Finance Bill has been published in full, it’s clear that the legislation will have an impact on all businesses.

 

To help our clients, and readers of this blog, we have decided to highlight and explain some of the new changes that will have an impact on Irish firms in 2013. After all, any regulatory development is significant, even if the mainstream media don’t give it wall-to-wall coverage. The Finance Bill is a hefty piece of legislation, so we are going to divide it into manageable portions over the coming weeks – beginning with changes to personal taxation.

 

Reduced Relief

Being in deficit closing mode, the Government has sought to close loopholes and gain money from peripheral changes while avoiding outright rises in income tax.

 

The Foreign Earnings Deduction (FED) has been extended to include Algeria, Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania for the 2013 and 2014 tax years. Meanwhile, from July 1, maternity, adoptive and health and illness benefit will become subject to Income Tax.

 

Perhaps more significantly, the Bill has made changes to ex-gratia redundancy payments. From January 2011 Top Slicing Relief will no longer be available on ex-gratia lump sum payments where the non-statutory element of their redundancy or termination payment is €200,000 or more. This will be extended to cover lifetime ex-gratia payments made upon the death or disability of an employee. Foreign Service Relief shall also be abolished.

 

A key reform has also been made to the film relief scheme, which will no longer be available to individual investors. Instead, the relief will be in the form of a payable 32% tax credit to film Producer Companies (PCs). It is understood, however, that these changes will not take effect until January 2016. Meanwhile, tax relief on donations made by an individual will no longer apply to the donor. Relief will be given to the charity at a blended rate of 31%. As a result of this, donations to approved bodies will not be within the scope of the high earners restriction. An annual donation limit of €1m per individual per year has also been introduced.

 

Closing Loopholes

Anti-avoidance measures are an easy political ‘sell’, and have also been introduced in the current bill. One measure concerns the remittance basis of taxation for non-domiciled individuals. Under the Bill, when a non-domiciled individual transfers his or her foreign-sourced income (or property bought using foreign-sourced income) to their Irish-based spouse or civil partner, and that income is remitted to the State on or after 13 February 2013, the non-domiciled person is deemed to have made that remittance.

 

Meanwhile, the Bill has also closed a loophole in schemes whereby employers place funds in a trust or other structure and the trustees grant long-term loans to employees rather than the employer paying their employees a salary or bonus. From February 13, payments to current, former or prospective employees out of a trust that is funded by the employee’s employer will be deemed to be income subject to Income Tax and Universal Social Charge. The provision, however, will not apply to genuine Employee Benefit Trusts.

 

New Relief

The Bill has also introduced a new incentive scheme for the conversion and refurbishment of dilapidated Georgian houses, the Living City initiative. It provides tax incentives for works performed to refurbish residential and retail buildings, either to bring them up to a habitable standard or even to make improvements to buildings which are currently inhabited. The incentives are targeted at owner-occupiers rather than developers. The Living City initiative will be commenced by Ministerial Order and will apply to qualifying expenditure incurred within a five-year period of that date – you can find out more here.

 
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If you’re keen to know about these in more detail, we’re happy to offer advice on how these changes can impact on you. Justcontact us to set up a meeting.

 

Declan Dolan

 

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Q: I’m a 50-50 partner in a small business. My partner and I built up the company from scratch, and growth happened quite organically. However, we’ve come to the conclusion that it will only ever be big enough for one owner-manager: one of us will have to bow out.

 

We still haven’t decided who should sell up, and I have a tonne of questions. If I sell, what are the tax implications? The amount involved would be between €20,000 and €40,000.

If I were to buy the shares, would it have to be from my own pocket? Could I borrow the money in the company name, or would it have to be my own? I had a brief chat with my bank, who said they’d only advance a personal loan, but I’m not sure if this is a legal requirement or just policy.

 

A: First off, I’d say that both you and your partner need independent professional advice. This is a very important transaction, and making a right mess of it would be costly. However, we can offer a few general pointers.

If the company has the cash available to support it, the most affordable way to do the transaction would be by way of a share buyback. The company would simply buy the shares of whichever shareholder wants out using its own money. After this is done, the shares can then be cancelled, leaving the other partner as the sole shareholder.

There will probably be tax to pay, though it may qualify as a Capital Gains Tax transaction rather than a distribution liable for income tax. This depends on certain conditions – the shares must have been owned for at least five years, and the buyback cannot adversely affect the company’s working capital.

If the company has to borrow money to fund a buyback, this is viewed as a distribution for tax purposes – the partner selling up will be liable for income tax at up to 52% rather than Capital Gains Tax of 33%. Your bank, as you’ve said, may insist on you borrowing the money personally for added security.

The only way to avoid tax on this entirely would be if the departing partner is over 55 and satisfies a range of conditions, including length of ownership and time spent working as a full-time working director of the company. In this instance, you or your partner may be able to claim retirement relief from Capital Gains Tax.

Again, this is something where your circumstances, those of your partner, and the current state of the company all have a significant impact. I’d advise you to contact us to set up an initial meeting, and we can then map out the best way forward.

Understandably enough, the Revenue Commissioners have in recent years been stepping up the Revenue Audit Programme in a bid to ensure every business is paying its fair share in tax. For most businesses, this shouldn’t be a problem – modern accounting methods and computer records make it far easier than before to undergo the audit process when everything is above board.

The culture of under-the-table payments and creative book-keeping is sadly not dead yet. However, a renewed audit approach from Revenue – and modern methods of detecting non-compliance – may yet kill that off.

 

Computer Auditing

For starters, Revenue has been keen to embrace the use of computer or e-auditing techniques. This includes the use of a sophisticated data interrogation programme, IDEA, during the audit process. The programme allows Revenue auditors to rigorously interrogate accounting records, gleaning information that traditional auditing simply wouldn’t.

For example, IDEA can alert Revenue auditors where sales are deleted from accounting records, where incorrect VAT rates are applied, and where payments are made to employees without proper deduction of tax. In other words, when Revenue has determined that it will carry out a computer audit of a business, it is effectively impossible for non-compliant businesses to ‘cover their tracks’.

It’s worth noting that, before conducting a computer audit, Revenue often seeks to have a pre-audit meeting so that the auditors can familiarise themselves with a company’s IT system. This meeting is not part of the formal Revenue audit process – therefore, a company still has an opportunity to make a prompted qualifying disclosure before the audit officially begins.

 

Self Review

Revenue has also been keen for companies to effectively audit themselves and disclose their findings: rather than carrying out an audit, for example, Revenue has requested that certain firms ‘self review’ their compliance procedures. Companies that do this must report their findings to Revenue, and detail the scope of the review. Based on this, Revenue will decide whether or not to carry out a full-scale audit.

Even though this process is an onerous one, there is a key benefit to ‘self review’: any underpayment or incident of non-compliance that a company discovers can be regularised by making an unprompted qualifying disclosure, which is far better than having an irregularity come to light through an audit.

 

Consequences

Anyone in business should be aware that, when a Revenue audit uncovers non-compliance, it can be expensive and deeply damaging for a business. For example, companies will have to pay any underpaid tax, interest at an annual rate of 10%, and potential penalties of up to 100% on the underpaid tax. What’s more, Revenue’s annual tax defaulters list could make for uncomfortable reading.

The vast majority of businesses do not seek to hoodwink Revenue. Many perfectly honest businesspeople have found themselves on the wrong side of a Revenue audit simply by having slack bookkeeping practices.

There is no reason why you should be oneof those businesspeople, as it is perfectly possible to make sure that your books are in order. Aside from having a qualified book-keeper involved on a regular basis, we also recommend that every company undergoes a regular ‘health check’ to ensure compliance and proper record keeping. That way, businesspeople don’t need to open correspondence from Revenue with dread, or nurse a deadly fear of audits.

 

DCA Accountants and Business Advisors provides a range of services to ensure our clients green revenue audits with confidence, from day-to-day bookkeeping and regular checks to pre-audit preparations. If you’re concerned about this aspect of your business – or just want some peace of mind – don’t hesitate to contact us.