SME's in Ireland Professional Service Surcharge

What is the Professional Service Surcharge?

The Professional Service Surcharge is an additional tax imposed on Limited Companies that derive most of their income from professional services. It was introduced to prevent tax avoidance by ensuring that income from these services is subject to a higher tax rate.

Before setting up your company in Ireland, it is important to know that this additional tax on professional service companies exists and it can increase the tax on profits from 12.5% to 19.06%.

Who is Affected?

The surcharge applies to close companies that provide professional services. A close company is typically one that is controlled by five or fewer shareholders. Professional service providers are not defined in legislation - we rely on Revenue's guidance and Case Law to determine what a professional service is. According to the Revenue Commissioners, professional services include, but are not limited to, the following:

• Accountants
• Actors
• Actuaries
• Archaeologists
• Architects
• Auctioneers/Estate Agents
• Barristers
• Computer programmers
• Dentists
• Doctors
• Engineers
• Journalists
• Opticians
• Private School operators
• Quantity Surveyors
• Solicitors
• Veterinary Surgeons

The following activities are generally not considered to constitute the carrying on of a profession:

• Advertising Agents
• Auctioneers of livestock in a cattle mart
• Insurance brokers
• The operation of a retail pharmacy
• Management Consultant
• Public relations companies
• Stockbrokers

Why Are These Companies Targeted

The surcharge aims to address tax avoidance strategies where professionals retain profits within their Limited Company to benefit from lower corporate tax rates instead of distributing the profits as dividends, which would be subject to higher personal income tax rates. By imposing the surcharge on undistributed income, the policy encourages profit distribution, thus increasing the overall tax equity.

Calculating the Professional Service Surcharge

The surcharge is calculated at a rate of 15% on 50% of the undistributed professional service income. Undistributed income is the portion of the company’s income that has not been distributed to shareholders as dividends within 18 months after the end of the accounting period.

Example Calculation:

1. Undistributed Taxable Profits from professional services: €100,000
2. Corporation Tax Rate: 12.5%
3. Surcharge Rate: 15%

Corporation Tax = 12.5% * €100,000 = €12,500

Surcharge = 15% * 50% * (€100,000 - €12,500) = €6,562.50

This means that if, for example, a computer programmer contractor’s company has €100,000 of undistributed taxable profit, the total amount of tax payable would be €19,062.50, equivalent to an effective tax rate of 19.06%.

In addition to being subject to this extra tax charge, professional service companies are restricted from a number of tax reliefs, such as relief for investment in corporate trades and start-up company relief.

Reporting and Payment

The surcharge must be reported on the company’s Corporation Tax return (Form CT1). It is crucial to keep detailed records of all income, expenses, and distributions to ensure accurate reporting.

For guidance on completing Form CT1, see our article on Corporation Tax Ireland.

Reducing the Surcharge Liability

Companies can reduce their surcharge liability by considering the following options:

• Expenses - Ensure all expenses of the trade are claimed during the tax year, keeping in mind items such as the Small Benefit Exemption, Travel & Subsistence and the Remote Working Daily Allowance.
• Increase salary - a director should consider increasing their salary to maximise the benefit of tax credits and cut-offs.
• Make pension contributions which can provide tax relief and reduce the company’s taxable income.
• Distributing income as dividends within 18 months of the year end date.

At €99 + VAT per month, Incorpro's Ongoing Contractor Package includes an introductory setup call and annual accounts & tax review where we seek to help you manage any potential surcharge liability.

Consequences of Non-Compliance

Failure to comply with surcharge regulations can result in penalties and interest charges. It is vital to understand the requirements and maintain accurate records to avoid these penalties.

For more information on managing distributions and compliance, read our Director Loan Accounts: Legal and Tax Implications.

Conclusion

The Professional Service Surcharge is a important consideration for SMEs providing professional services in Ireland. Proper understanding and management of this surcharge can help Limited Companies avoid additional tax liabilities and penalties.

Further Guidance and Assistance

Should you have any queries or require assistance with your Accounting and Tax needs, our dedicated team at Incorpro is here to help. Connect with us by calling 01-4429409, or visit our Contact Page for more ways to get in touch. Stay updated and engaged by following our Social Media Pages on Twitter, Facebook, LinkedIn and Instagram.

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