Start-up companies

Launching a start-up business

Starting your own business presents many challenges. How can you find the time to develop a revolutionary product or service whilst managing all the demands of your business? How do you know when to start employing staff, and where should you locate? How do you access potential customers, and how do you write a business plan? Here are some considerations that should help you at the start of your business journey.

Start-up funding

Raising finance

Raising finance is a real challenge for start-up businesses. Finance providers have expectations, requirements and limits you have to adhere to. You also have to understand how best to work with the market, depending on your stage of development.

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Identifying funding requirements

Having a business plan in place will help identify your funding requirements. It will also help identify possible ways to resolve them. It is also important to detail the quantum of funding required and how you are going to use it.

For many start-ups, conventional debt funding may not be available until the business can prove strong, growing cash flows. Equity funding is likely to be the main source available to most companies in the start-up sector.

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Terms of funding

When equity is being provided, the terms on which it is made available need to be considered. Equity funding tends to be more expensive than conventional bank debt.

Whether funds are being raised from family and friends or from a venture capital or similar institution, it is important that the terms on which the funds are being provided are set out in a share subscription agreement.

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Investors and investing

Whether funds come from family and friends, angel investors, venture capitalists or EIIS funds, investors are investing in you. They are investing in your management team and on your ability to deliver. You must be able to prove you can protect their investment.

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Early stage tax reliefs

Start-up relief for companies

There is a relief from corporation tax available for newly incorporated companies in their first three years of operation.

Where the relief is available, it can shelter corporation tax arising on the profits of the company. It can also shelter chargeable gains arising on trading assets.

The value of the relief depends on the corporation tax liability of the company. It also depends on the amount of employer's Pay Related Social Insurance (PRSI) paid.

Provided enough employers PRSI is paid, full relief may be available where the corporation tax liability is not more than €40k. Where the corporation tax liability is more than €40k, but less than €60k, then partial relief may apply. No relief is available where the corporation tax liability exceeds €60k.

In cases where the relief is not fully utilised, it may be possible to carry forward the relief. If that is done, it can be offset against the company's corporation tax liability in the fourth and subsequent years.

Start-Up Refunds for Entrepreneurs (SURE)

SURE relief may entitle you to an income tax refund of up to 41% of the capital investment you make. Although the extent of the relief depends on the size of your investment, you may be entitled to a refund of income tax incurred by you in the six years before setting up your business.

The basic requirements to qualify for the relief are as follows:

  • You must set up a new company which engages in qualifying trading activities,
  • Your investment in the company must comprise the purchase of shares,
  • You must have had mainly PAYE income in the previous four years, and
  • You must take up full-time employment in the new company.

Key Employee Engagement Programme (KEEP)

The KEEP scheme is aimed at SMEs, and allows them to offer share options to employees in a tax efficient manner. It is designed to encourage more SME employers to introduce share options to reward, incentivise and motivate staff.

The main benefit of KEEP is that there is no income tax when the options are granted. No tax will arise until the sale of the shares, at which point CGT of 33% will be payable by the employee on any gains.

Some of the main conditions of the relief for companies and individuals are:

Company requirements  Individual requirements 
The relief applies to most trading businesses with some exceptions, including building and construction companies, professional services and financial services. The individual must be a full time employee of the company and devote at least 30 hours per week to the company. 
The total unexercised share options in a company cannot exceed €3m. Annual limit for the employee/director cannot exceed €100k in any one year, €250k in any three consecutive years or 50% of employee’s annual remuneration in the year of issue.
The company must come within the definition of an SME at the date of grant.  The individual cannot control directly or indirectly more than 15% of the ordinary share capital.
Filing requirements in respect of KEEP shares will arise.  KEEP shares must be granted at market value to the employee and must be
held for no less than 12 months by the employee, subject to certain exceptions. 
A holding company may qualify if it wholly owns shares in a qualifying subsidiary company.  KEEP shares must carry no current or future preferential right i.e. dividends or right on winding up etc.

Managing tax compliance

Every year, companies face a wide range of tax compliance deadlines. VAT, PAYE and corporation tax deadlines can often fall under the radar for start-ups.

Revenue can impose interest and penalties on companies who file late or incorrect returns. And when a business is at the start-up stage, cash flow is critical.

An overlooked way of boosting cash flow is through managing your tax affairs. This is particularly relevant for fiduciary taxes like VAT and PAYE. For VAT, there are some cash saving opportunities, including:

  • Filing less regular VAT returns
  • The cash basis for accounting for VAT
  • Foreign VAT refunds
  • VAT groups
  • Bad debt relief

The administrative burden for a start-up can be reduced by filing PAYE returns less frequently, as well as generating cash flow savings.

The new Real Time Reporting requirements as part of the modernisation of the PAYE system in Ireland will be a significant change for employers. Revenue may impose penalties if businesses are not adequately prepared.

EIIS

The Employment and Investment Incentive Scheme (EIIS) was introduced in 2011 as the successor to the BES scheme.

Where the conditions of the EIIS are satisfied, the relief can result in an income tax saving for qualifying investors. The EIIS is an attractive relief and gives qualifying start ups a real advantage in terms of their ability to attract investment. Start-ups should therefore be mindful of the benefits of the EIIS when considering funding rounds.

An outline of the key features is as follows:

Company conditions

  • SME fundraising limit: €5m annually (€15m lifetime limit)
  • Qualifying company: Must be an SME carrying out relevant trading activities

Investor conditions

  • Minimum required period of investment: Four years (to avoid clawback of the relief)
  • Maximum annual relief for each investor: €150,000

There are other specific conditions which can be overlooked: 

  1. Qualifying trade: A company must carry on a “qualifying trade”. Certain trades will not qualify, such as dealing in shares, financing activities and dealing in development land. 
  2. First round of funding: If it is a company’s first round of EIIS funding, the funding will only qualify if it is received within seven years of the commencement to trade. 
  3. Second and subsequent rounds of funding: For EIIS to be available for a company’s second or subsequent round of funding, the fundraising must be foreseen in the company’s original business plan. In our experience, this can be an issue and companies seeking to claim the relief can come unstuck on this rule. 

The EIIS can be a valuable relief. Recent legislative changes have given rise to some extra complexities which must be borne in mind before claiming the relief.

Contact us

Hugh Campbell
Director, PwC Ireland (Republic of)
Tel: +353 1 792 6845
Email

Shane Kerins
Manager, PwC Ireland (Republic of)
Tel: +353 1 792 7264
Email

Noreen O'Sullivan
Manager, PwC Ireland (Republic of)
Tel: +353 1 792 7947
Email

Daniel O'Beirne
Manager, PwC Ireland (Republic of)
Tel: +353 1 792 5393
Email

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