The following article explores the aspects of building value and maximising return from taxation. No, don’t switch off because this isn’t one of those financial type pieces designed to dictate rather than explain. Instead, Aidan Byrne, lead tax partner with RSM Ireland, has some nifty advice when it comes to planning for the future of your business from a tax perspective.
Tax is part and parcel of our lives – whether you’re an employer or employee, the duty can be, well, taxing, if you let it get on top of you. For the business owner, the financials and keeping a clean sheet should be a top priority if building value and transparency is at the forefront of your transactions.
According to Byrne, this shouldn’t be a stressful process although he concedes that even Albert Einstein acknowledge the complications of this duty when he said: “the hardest thing in the world to understand is the income tax”.
“We often find clients who are interested in fancy tax structures but at the end of the day they don’t make any sense if they don’t align themselves with commercial goals,” he said. “Secondly, there are a lot of stakeholders involved. Tax also involves family members, key staff, suppliers, customers and financial institutions. And most importantly, there is you and your tax. It’s amazing the amount of people who talk about succession planning without thinking if they have the cash to get them from today until they die, instead they are thinking about a spouse or partner and focused on other people rather than themselves.”
Byrne recommends several aspects to setting the tax motions in process. He said an important factor was give your financials the health check they need to be in order. He also advises companies to engage with management teams within their organisation and develop leaders or at least find a way for generations to learn from one another.
“You must be prepared to make changes and change course if needs be,” he said.
Byrne presented his ideas at the RSM Ireland conference on Planning for the Future and Maximising Value, in Dublin’s Hilton Hotel in July, where tax structures and tax planning were part of his discussion.
“Tax is complex and multi-faceted,” he said. “When looking at the profit or value within your business, the key is to focus on profit and value after tax, and not before. You must consider longer term objectives versus shorter term tax savings.”
For Byrne, there are specific tax matters to be considered when weighing up tax aspects of building values. The first concerns staff engagement while the second looks to the pros and cons of giving shares to employees. Then there is the question of tax reliefs and what options are available for consideration.
“Retirement relief and business relief are valuable reliefs that can reduce tax liabilities in circumstances of succession to family or via a trade sale,” he said. “CGT relief may apply to the sale of chargeable assets where proceeds up to €750,000 – or 500,000, if over 66 – are disregarded for CGT purposes. There is no limit on a sale to family members if under the age of 66, but this is restricted to €3m over the age of 66. Business relief facilitates the passing of assets to family members at 10% of their actual value but neither business nor retirement relief requires the individual passing the assets to actually retire.”
Another relief to be considered is that of entrepreneur relief, which allows for a reduced rate of 10% to a gain arising on the disposal by a relevant individual of their chargeable business assets (CBA), up to a lifetime limit of €1m.
“CBA are assets, including goodwill, used for the purposes of a qualifying business,” he said. “This also includes shares of a company in which a qualifying business is carried out, including shares in a holding company.”
“Particular care is required regarding the availability of these reliefs if there is property involved as there are specific restrictions in place so for those involved in development and construction operations an early understanding of the limitations imposed is very important.”For Byrne, the essential step is to start early and get your tax finances in order.
“Give it the time it deserves,” he urges.
Aidan Byrne, lead tax partner, RSM Ireland