I was recently made redundant and received a redundancy payment. I want to invest some of this money in a new company I am starting up and was told I could claim some of this back as a tax refund. How do I go about claiming this?
The relief you are referring to is available within what’s called the Seed Capital scheme. This scheme allows a former PAYE worker to reclaim income tax paid over the previous six years when they invest in qualifying companies. If your new venture qualifies under the scheme you can start to claim the refund immediately after the company starts to trade. It’s important to note however that if you dispose of this investment within three years the refund will be clawed back.
First off, you need to establish if your new company will qualify. The first criteria relates to size. The relief is targeted mainly at micro and small enterprises with some relief available to medium sized enterprises. Micro and small enterprises are defined as companies with less than 50 employees and with turnover not exceeding €10m.
Your new company must also be a bona-fide new venture. So for example a sole trader cannot transfer the business to a company and claim this relief. The relief is not available to some businesses such as companies who carry out professional services.
Lastly, to be eligible for the relief you must satisfy the following conditions:
1. You must be a PAYE worker.
2. You must enter into a full time employment contract with the company for at least one year.
3. You must subscribe for shares in the company.
4. You must hold at least 15 per cent of the issued share capital of the company for at least one year.
You can offset the entire amount of your investment over any of the six previous years, however a cap of €100,000 in deduction applies in any one year. For a top rate tax payer this means they would get a tax refund of €4,100 for every €10,000 invested.
So, for example if in 2011 you invest €50,000 in this new venture and you decide to claim the deduction for 2009 as this was your highest earning year (income of €120,000), you would receive a refund of €20,500 (€50,000 *41 per cent).
Up until now, the take up on this scheme has been relatively low with many feeling its administration was unnecessarily cumbersome. The Finance Act 2011 contained significant changes to the Seed Capital scheme expanding the number of qualifying companies.
This was approved by the European Commission on November 24, 2011. These changes simplified the application process and made the scheme available to more companies.