We get numerous questions in relation to the Professional Service Surcharge on Corporation Tax and how It relates to our Professional Contractor Clients. In this article we will address how it works, and all you need to know about how it relates to Contracting through your own Private Limited Company.
What is Professional Service Surcharge?
As we all know at this point, the headline figure for Corporation tax in Ireland is 12.5%, therefore all profits in a trading company that are kept within a company are liable to tax at this rate.
However, many years ago Revenue introduced Section 441. The purpose of this section was to put an additional tax on Professional Service companies who do not distribute all their profits to the shareholders.
Revenue felt that limited companies were being used to shelter tax, for example, paying tax at 12.5% instead of the marginal rates of 52%.
The surcharge tax is equal to 15% of 50% if the undistributed reserves (or retained profits). This equates to 6.56% of the companies profits in a year.
Therefore, Professional Service Companies have an effective rate of tax of 19.06%, not just the 12.5% Corporation Tax.
What is a Professional Service Company?
Revenue defines a Professional Service Company as a company where the principal part of the company’s income is derived from the activity directly of a professional, and/or which has or exercises an office or employment.
The Tax Acts themselves do not define “profession”. The tax case law states “that profession involves an occupation requiring either intellectual skill as in painting, sculpture or surgery or alternatively, a skill that is controlled by the intellectual ability of the operator”.
It distinguishes this from an operation that is substantially the production or sale of commodities.
As always with Revenue, they will judge each case on its individual merits where it is unclear or uncertain.
The majority of Professional Consultants will fall under the surcharge, however, in some cases they may not, a recent Tax Appeals case found that a Management Consultant does not fall under the remit.
Should you require any further information in relation to the surcharge, please do not hesitate to contact your Private Limited Company manager and they will be happy to advise and assist.
Alternatively, if you are not a client of Icon Accounting and would like to hear more about the Professional Service Surcharge, you can reach out to our team directly on 01-8077106 or by emailing firstname.lastname@example.org.