Entrepreneurial Relief: A tax break that can save you €230,000 in tax

Entrepreneurial Relief is simply one of the most valuable tax reliefs available to an SME owner. If you’re reading this, and you are a business owner, even if you’re only starting out on your business journey, let me try and get your attention. If you sell your business or simply close it one day and it has a value of €1,000,000 or more at that time, this relief could save you €230,000 in tax.

If you sell or liquidate a business and make a gain of up to €1,000,000, you would usually pay 33% on that gain or €330,000 if the gain equals €1,000,000. The tax relief available under Revised Entrepreneurial Relief (Section 597AA TCA 97) acts to tax this capital profit up to a gain of €1,000,000 at 10% rather than 33% if all conditions are met.

Most companies start off with a very low value, usually equal to share capital of €100 and if you sell a business for say €1,000,000, you have made a gain of €999,900 which would be taxed at 33% without this relief.

There are a number of conditions that you must meet to qualify. You may even be familiar with some or all of these.

Unlike most articles on this subject, I’m not going to go through these in great detail. At a high level they are:

(i) The assets disposed of must be chargeable business assets. These includes ownership of the assets of a sole trade, limited company or holding company.

(ii) You must have owned the shares for a continuous period of three years out of the previous five years. This is actually a trickier test than it looks.

(iii) You must meet some working time conditions. Where this can be tricky is if you spend time on more than one business.

The point I’m really trying to get at with this post is this: Do you think the Revenue Commissioners are going to let thousands of people, who might be able to qualify, to walk away with €230,000 without a fight?

Even if the gain is say €400,000 and you are disposing (selling or liquidating) of your business (sole trade or limited company), the relief can reduce your tax from €132,000 down to €40,000, a substantial saving of €92,000.

There are literally thousands of business owners who could qualify for this relief and they will fall into one of these categories. These categories are my own.

(i) The Unknowing: These are the people who have never heard of this relief. In theory, if you’ve read this far, this shouldn’t include you. However, someone who’s heard of this relief and never then investigates whether they can benefit from the relief will still fall into this category in my opinion.

(ii) The Denied: This is a group of people who believe, or have been led to believe, they will qualify for this valuable relief, and are denied by Revenue. It is almost certainly the case that had this group of persons made certain changes in advance of claiming this relief, that they would have been able to qualify. There are important technical features to this legislation that a tax consultant can steer you through but which an accountant will not be aware of. Tax consultants are experts in taxation, accountants are experts in accounting.

(iii) The Prepared: These are the group of people who are well aware of the potential trap doors connected with this legislation and take the necessary steps to maximise the tax benefits contained.

Let me give you one of the many drawbacks. If you’re disposing of a group of shares via a holding company. If one of these groups has ceased to trade, or more commonly a dormant company. In such a scenario, no tax relief is available on any of the group companies being disposed, not just the dormant company.

I don’t believe there is a lot of common sense in this disqualifying provision. However, when you think about it, there’s a lot of sense from Revenue’s point of view. It means you don’t get the money, the tax break. Finance ministers, even pro-business finance ministers such as Paschal Donohoe, like being popular on budget day. However, for it to become law, it must be part of the Finance Act which then updates the relevant Tax legislation. Sometimes by accident and sometimes intentionally, small clauses are inserted with one aim: to reduce the number of successful claims in the future.

If we’re going to be fair and give the Revenue Commissioners the benefit of the doubt and say that the dormant company clause was an accident, it seems only fair to ask why they haven’t removed it? I have my opinion and you may have yours.

Revised entrepreneurial relief is one of a number of beneficial tax breaks contained under Irish tax legislation. There’s no reason you can’t benefit, as long as you are in the right hands. If this article holds interest for you or a client, please feel free to contact me at [email protected] or call me on 086-888-8570.?