Ireland has a self-assessment system for tax, which means that it is up to you and your company’s bookkeeper and/or accountant to determine if you’re in compliance with the law. Usually, this is pretty straightforward. However, a term that will trip quite a few businesses up because it is not that well defined is professional services.
If you are considered a professional service in Ireland, there are significant tax implications that will affect your day-to-day operations. In addition, many grants available to Irish companies exclude professional services in the application process. For this reason, it’s important to establish if you fall into this category and prepare yourself for the implications.
Professional services definition and scope
Say “professional services” to most people and they will immediately think of lawyers and management consultants. However, Irish Revenue has a very different perspective. In Ireland, you could be classified as a professional services provider if you work in one of these areas:
- services of a medical, dental, pharmaceutical, optical, aural, or veterinary nature
- services of an architectural, engineering, quantity surveying or surveying nature, and related services
- services of accountancy, auditing or finance and services of financial, economic, marketing, advertising, or other consultancies
- services of a solicitor or barrister and other legal services
- geological services
You may assume that the key to defining professional services is whether or not the work being done requires a qualification. For example, a chartered accountant conducting bookkeeping activities isn’t a professional service because bookkeeping doesn’t require a qualification. A lawyer giving HR advice is not carrying out legal work and, therefore, not providing a professional service in this instance. However, by including services such as marketing, where there is no barrier to entry and no required qualification or oversight, this distinction has been somewhat blurred by Revenue.
The tax implications of selling professional services
If you provide professional services to a local authority, public body, or state/semi-state agency, Professional Services Withholding Tax (PSWT) will be imposed. This is the case whether you are an Irish or foreign supplier of such services. In Ireland, PSWT is set at 20% and is deducted at source (i.e. upon payment of your invoice). This used to involve issuing the supplier (you) with a physical Form F45 showing the amount paid and tax retained. Nowadays, it’s all done online, which means you can simply log into ROS and see all the tax withheld from you in one easy click, with no paperwork to manage.
When you come to file your Income Tax or Corporation Tax for the relevant tax year, you can use your PSWT as a credit against the tax you owe (or claim a refund if the amount you owe is less). Another tax implication to consider is the professional services surcharge. In Ireland, businesses are subject to a very competitive 12.5% corporation tax rate. However, for professional services, this can go up to 19%! The surcharge includes companies providing services to professional services companies.
What can sometimes catch people out is that a service which does not in itself attract PSWT can come within the scope of PSWT where it forms part of a wider consultancy service. For example, in the provision of software implementation services by an IT consulting firm, while the software itself may not be subject to PSWT, if the consulting firm provides additional advisory services or customisation as part of the software implementation, the entire package of services, including consultancy, could be subject to PSWT.
When it comes to expenses that you recharge to clients (for example travel, subsistence, postage, printing, stationery, secretarial services, or advertising) these also come under the scope of PSWT. Revenue is clear that the entire amount is subject to withholding tax, even where expense items are isolated for separate payment or where expenses are separately invoiced. The only things that can be excluded are stamp duties, Land Registry fees, Deed of Registration fees, Company Office fees, and court fees.
Does providing professional services affect eligibility for grants?
You will find that professional services activities are very often excluded from grants. A recurring issue is that professional services are not defined in the eligibility criteria so people assume it is only deterring legal or financial services, but it can extend much wider than this. For example, the Employment Incentive and Investment Scheme (EIIS) which allows businesses to take in money tax efficiently, excludes professional services from applying for this scheme.
Also affected is tax relief for startups. Section 486C tax relief encourages companies to avail of a reduction in corporation tax for first three years of business, as long as they have some employees for which they are paying PRSI. However, once again, professional services companies are excluded from this grant.
Understand PSWT and how it affects your business
When advising clients, we believe there are two important things to consider when determining if you are providing professional services.
- What is the type of service you are offering and who is providing this service? As already explained, the qualifications required to do the service and whether the person has the relevant qualifications can be determinants for whether it is a professional service as understood by Revenue.
- Are professional services a principal activity for your business? This is important to know because if over 50% of what you do is considered a professional service, then the whole entity can be surcharged. However, in these cases, some might split their business in two, or one business might bill the other business.
For a comprehensive look at the various business scenarios affected by Professional Services Withholding Tax, including Revenue opinions on specific cases such as advertising, auctioneers, board members, coroners, insurance, and more, download the Tax and Duty Manual Part 18-01-04.
