Ireland has a self-assessment system for tax, which means that it is up to you and your company’s bookkeeper to determine if you’re in abidance with the law. However, this is not as straightforward as it sounds when certain terms, such as professional services, are not clearly defined.
There is a significant tax implication when invoicing professional services, and many grants available to Irish companies exclude professional services in the application process. For this reason, companies want to be able to clearly determine if it necessary for them to pay this tax and in what circumstances it is not applicable.
What defines professional services?
Many people assume professional services only refers to the legal and financial types of services. But, according to Revenue, they can include a variety of services, such as marketing, management consulting, computer programming as well as the more typical professional services of accountancy and economics.
However, what is key to defining professional services is whether or not the work being done requires a qualification or not. A chartered accountant conducting bookkeeping activities isn’t a professional service because bookkeeping doesn’t require a qualification. For the same reason, a lawyer giving HR advice is not legal work and, therefore, is not a professional service in this circumstance.
What are the tax implications of professional services?
When providing professional services to a state or semi-state body, Professional Services Withholding Tax (PSWT) is imposed. In Ireland, PSWT comes to 20% and is deducted at source (i.e. upon payment of your invoice). Your client must supply you with a Form F45 which shows they have paid for the service and retained the tax. You can then claim the tax withheld as a credit against your Income Tax or Corporation Tax in that tax year.
Another tax implication to consider is the professional services surcharge. In Ireland, businesses are taxed 12.5% in corporation tax, which by global standards is very competitive. However, for professional services, this can go up to 19%! The surcharge includes companies providing services to professional services companies.
Does providing professional services affect eligibility for grants?
You will find that very often professional services are excluded from grants. A reoccurring issue is that professional services are not defined by the scheme, and 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.
This can also affect tax relief for start-ups. 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.
What can you do? The good news is…
At Beyond, we have experts who provide fantastic advice on this issue. In particular, they advise that 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 are significant 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.
Unsure if Professional Services Withholding Tax applies to you? Or perhaps you’re applying for a grant, and you’re not sure if the services you provide will qualify? At Beyond, we provide sound, confidential business advice informed by experts. Get in contact today or call us on 01 536 8942.