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Taxation and the Use Of Companies by Professionals

Part 2: Use of Companies by Medics Introduction

In our last edition, we highlighted the issues that can arise generally when self-employed contractors incorporate their businesses into companies and use these vehicles to invoice the consultants(Directors) services to a third party client. We highlighted the fact that in the views of Irish Revenue there were occasions when the level of tax free expenses drawn down by the Director from the company was excessive and this may be a matter that accountants and tax advisors wish to review with their clients.

In recent weeks it has become apparent   that Revenue are becoming particularly interested in the way in which certain   medical consultants have structured their affairs by transferring all/part of   their business previously carried on as a sole trader into a company.

This is based largely on limited evidence that has   come to light in relation to certain transactions which Revenue view as   possibly having little bona fide commercial substance.


Examples of areas of concern to Revenue
  1. A legitimate        reason for any business person establishing a company has always been        the concept of limited liability which provides a certain level of        comfort at a personal level in the case of a claim against the business.        In general, there is a view that Doctors cannot trade though an entity        that purports to limit their personal liability in providing a duty of        care to a patient and therefore they must, when incorporating, use an        unlimited liability company. This automatically means that the normal        reason cited for incorporating a company does not apply in the case of        Doctors.
  2.  On a        transfer of a medical business to a company, valuations of goodwill have        been used which in the opinion of Revenue are excessive. While a        transfer of goodwill is of course subject to capital gains tax, on first        principals this historically was at a much lower tax rate than if the        same value was released as income liable to tax at marginal rates as        high as 55% in some cases. Also, where such a transaction took place,        any resulting funds owed to the sole trader by the company may be        reflected in a Directors Loan Account balance higher than would        otherwise be the case, which Revenue are concerned could be drawn down        tax free in lieu of salary over time.
  3. In some        cases, Revenue consider that a claim for relief from capital gains tax        on transfer of the goodwill under Retirement Relief or judicious use of        capital losses may not be genuine and they have a concern also that in        some cases it is very unclear as to whether or when a legal or        beneficial transfer of a business to a company has in fact taken place.


Some background and what Revenue plan to do

It should be remembered   that many of these incorporations took place primarily to achieve the   following objectives:

  1. Ensure that         profits of the medical practice are taxed at the corporate 12.5% rate         rather than at marginal income tax rates – this really only applies         when there is a significant difference between earned income of the         business and what a particular practitioner “requires” as         income and draws down from the company as salary taxed at source.
  2. Pension         planning – a 60 year old self-employed doctor earning €300,000 per         annum can only claim a deduction for pension contributions to a maximum         of €46,000 per annum (being 40% of a deemed income ceiling of €115,000)         while the same Doctor trading through a company could set up a         self-administered pension scheme and arrange for the company to make         almost unlimited tax effective contributions in some cases.


Clearly, therefore, the attraction to follow the incorporation   route was quite apparent to many professionals in this sector and it is   perhaps not surprising that Revenue are paying some attention to the bona   fides of such transactions and how they were effected in practice.

It is understood that in coming months Revenue will engage   with the medical profession and their advisors initially, probably through   non audit interventions to determine if any practices are being adopted   either currently or historically which give rise to a significant loss of Tax   Revenues.

Where timely replies are not received, it is quite likely that   full tax audits may take place which may well give rise to significant   penalties where Revenue views as to the lack of bona fides in certain cases   can be substantiated.

It is therefore possibly an opportune time to review past   transactions that accountants in practice may have engaged in with clients in   this area.



For Further information, Call Owen Dunne (Senior Partner) on 01-802 5400
Email: owen@kdaaccountants.ie