Close Company Surcharge

The corporation tax rate of 12.5% may increase if the close company surcharge is relevant to your company.

The close company surcharge provisions discourage rolling up investment, rental and professional income in companies by imposing an additional tax on such income retained and not distributed by the close company.

Section 441 Taxes Consolidation Act 1997 provides for a surcharge on certain undistributed income of service companies.  The section defines a service company as including close companies where the principal part of the company’s income is derived from the carrying on directly of a profession or the provision of professional services or where the company exercises an office or employment.  The tax acts do not define “profession” and therefore case law must be referred to.  The case of CIR v Maxse 12 TC 41 stated that a profession involves an occupation “…requiring either purely intellectual skill or of any manual skill controlled as in painting and sculpture or surgery by the intellectual skill of the operation…”

The following have been deemed to be a profession – an accountant, an actor, an actuary, an archaeologist, an architect, an auctioneer, a barrister, a computer programmer, a dentist, a doctor, an engineer, a journalist, a management consultant, an optician, a private school, a quantity surveyor, a solicitor and a vet.

The following have been deemed not to be a profession – a photographer, a stockbroker, an insurance broker, a pharmacist, a public relations company and a tax agent (who was not a member of a professional body).

While some activities are obviously “professional” e.g. accountants, doctors and architects it is genuinely difficult to see why some activities are seen as professional and others not.  For example a pharmacist is not seen as a professional but an actor is.  The rationale isn’t always obvious.

In P. MacMhaith v Brian Cronin and Associates Limited a case on this issue got as far as the High Court in 1984. The High Court supported the Circuit Court’s findings that a company which carried on a business as an advertising agency was not carrying on a profession and thus not subject to the close company surcharge. The following factors were relevant in respect of the Circuit Court’s decision:

  • No education or other qualification was required to carry out the work.
  • There was no code of practice governing or controlling advertising agencies.
  • Membership of the Institute was not compulsory and over one third of advertising agents are not members.
  • The Institute had no disciplinary function.
  • Advertising agencies advertise their own businesses.
  • In the course of advertisements they freely disclose who are their customers.

As this is a 1984 case and it reached the High Court we would find the factors raised to be of significance.

If you have any concerns as to whether close company surcharge applies to your company get professional advice without delay.

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