Corporation Tax

What is Corporation Tax exactly?

‍Corporation Tax is the primary tax that limited companies in Ireland pay on their profits. It applies to all types of corporate entities, from small micro companies to large multinationals, and is calculated based on the company's annual profits after allowable deductions and expenses. The tax is paid to Revenue Ireland, and the rates vary depending on the type of income generated.

‍There are two main corporation tax rates in Ireland: a 12.5% rate for trading income (the profits from your main business activities) and a 25% rate for non-trading income (such as investment income or certain types of passive income). This dual-rate system is designed to encourage active trading businesses while ensuring other forms of income are taxed appropriately. Understanding which rate applies to your different income streams is essential for accurate tax planning.

‍Every Irish company must prepare corporation tax computations and file a CT1 return, regardless of whether they made a profit or loss during the accounting period. Even if your company has no tax to pay, you still need to file a return declaring this position. Failure to file can result in penalties and interest charges, so maintaining compliance is critical for all business owners.

What is the current Corporation Tax rate in Ireland?

‍For trading income derived from active business activities, the standard corporation tax rate in Ireland is 12.5%. This competitive rate applies to profits generated from the sale of goods or services that constitute the company's main trade. For most startups and small businesses, this is the rate that will apply to their primary revenue streams.

‍Non-trading income is taxed at 25%. This includes investment income, rental income (unless it qualifies as a trading activity), and certain other passive income sources. There are also special rates for specific industries and activities, including a 33% rate for certain petroleum activities. Knowing which rate applies to each income source helps you forecast your tax liability accurately when preparing your financial statements.

When is Corporation Tax due?

‍Corporation Tax payments are due within nine months and 21 days after the end of your company's accounting period. For example, if your financial year end is 31 December, your corporation tax payment would be due by 21 October of the following year. This timeframe gives companies time to finalise their accounts and calculate their exact tax liability.

‍The CT1 return itself must be filed electronically with Revenue by the 23rd day of the month following the due date for payment. Using the same example with a 31 December year end, the CT1 return would be due by 23 November. Missing these deadlines triggers automatic penalty and interest charges, making it essential to mark these dates clearly in your compliance calendar.

What expenses are deductible for Corporation Tax purposes?

‍Most ordinary business expenses incurred wholly and exclusively for business purposes are deductible when calculating your corporation tax liability. This includes salaries, rent, utilities, marketing costs, professional fees, and depreciation on business assets. However, certain expenses have specific rules or limitations that you need to understand.

‍Entertainment expenses are generally not deductible, except for staff entertainment under specific conditions. Capital expenditures (money spent on buying or improving assets that will last more than one year) are not immediately deductible but can be claimed through capital allowances over several years. Understanding these distinctions helps you maximise legitimate deductions while staying compliant with Revenue's rules.

How does Corporation Tax interact with other taxes?

‍Corporation Tax exists alongside other business taxes that your company might need to pay. For instance, VAT (Value Added Tax) is collected on sales and paid on purchases, but it is separate from corporation tax. PAYE (Pay As You Earn) applies to employee salaries and must be deducted at source and paid to Revenue separately from your corporation tax bill.

‍When your company pays dividends to shareholders, those dividends are paid out of after-tax profits. The shareholders may then need to pay income tax on those dividends, depending on their personal tax situation. This "double taxation" (company pays corporation tax, shareholder pays income tax) is a key consideration when deciding how to extract profits from your business.

How is Corporation Tax calculated?

‍Calculating corporation tax begins with your company's profit figure from your income statement. From this, you deduct allowable business expenses to arrive at your taxable trading profits. Non-trading income is calculated separately and added to your total tax liability at the appropriate rate.

‍Many companies can take advantage of various tax credits and reliefs to reduce their corporation tax bill. Research and development (R&D) tax credits, for example, can provide significant relief for innovative businesses. Employment investment incentive schemes (EIIS) can also reduce your corporation tax liability while encouraging investment in your company.

What happens if I don't pay Corporation Tax on time?

‍Late payment of corporation tax incurs interest charges and penalties that can significantly increase your overall liability. Revenue charges daily interest on overdue tax at a rate set by legislation, which can accumulate quickly. Additionally, there are fixed penalty surcharges for late filing of the CT1 return.

‍Persistent non-payment can lead to more serious consequences, including Revenue taking enforcement action to collect the debt. This could involve attaching a lien to company assets, pursuing director personal liability in certain circumstances, or ultimately applying to have the company struck off the register. Maintaining a good compliance record is crucial for any business seeking financing or investment, as lenders and investors will conduct due diligence on your tax history.

Can I claim losses against Corporation Tax?

‍Yes, trading losses incurred in one accounting period can generally be carried forward to offset against future trading profits, reducing your future corporation tax liability. In some circumstances, losses can also be carried back to offset against profits of the previous accounting period, generating a tax refund.

‍There are specific rules around loss utilisation, particularly regarding "change of ownership" provisions. If your company undergoes a significant change in ownership or trade, the ability to use carried-forward losses may be restricted. This is particularly relevant for businesses considering restructuring or seeking equity financing, as it could impact the company's future tax position.

What records do I need to keep for Corporation Tax?

‍You must maintain comprehensive records to support your corporation tax calculations and filings. This includes your financial statements, invoices, receipts, bank statements, payroll records, and details of any capital asset purchases. These records should be kept for at least six years after the end of the accounting period to which they relate.

‍Digital record-keeping is increasingly common and acceptable to Revenue, provided the systems used meet certain standards. Proper record-keeping not only ensures compliance but also makes it easier to prepare accurate tax returns and respond efficiently if Revenue conducts an audit or inquiry into your company's tax affairs.