Mattie McGrath (Tipperary, Independent)
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99. To ask the Minister for Finance the way in which he will meet challenges faced by the self-employed (details supplied); and if he will make a statement on the matter. [5219/16]

Michael Noonan (Limerick City, Fine Gael)
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I understand that one aspect of the Deputy's question is referring to the close company surcharge, which has specific objectives as described hereunder. Broadly speaking, a close company is a company under the control of 5 or fewer participators (including their associates), or of participators who are directors. The vast majority of companies registered for corporation tax in Ireland are "close companies".  

There are specific rules in Irish tax law that are applicable to close companies. These rules are designed to ensure that persons who conduct certain activities and transactions through corporate structures do not receive an unfair tax advantage over persons who conduct similar activities and transactions without incorporating. The close company surcharge applies in respect of investment income earned by a company, such as interest, dividend or rental income, which is not distributed to the company shareholders within 18 months of the company's year-end. The surcharge does not apply to the retained trading income of a close company. With investment and rental income of a company subject to tax at a 25% rate, there would be a strong incentive in the absence of a surcharge for persons to accumulate and retain such income within a company and thereby avoid marginal rate income tax and USC.  

With regard to professional services companies (i.e. those that are engaged in professional services) that are close companies, the surcharge is extended to include a surcharge of 15% on one half of any trading profits which are not distributed within 18 months of the end of the accounting period. The activities of professional service companies are those that are typically carried on by an individual or partnership such as, for example an accountant, solicitor, engineer, doctor etc. The service company surcharge was introduced in order to counteract an abuse whereby these activities were diverted to a company, being a company controlled by individuals who are actually providing the relevant services, and the income is withheld from distribution and therefore not subjected to income tax. As the surcharge only applies to 50% of undistributed trading income, provision is made for retention and re-investment of profits within professional services companies.  

In order to assist small businesses, in Finance Act 2013, I increased the minimum threshold of undistributed income from €635 to €2,000, thus enabling small businesses to retain a higher amount of income for reinvestment without being liable to a surcharge.

In relation to tax credits available to self-employed individuals, as the Deputy is aware, I introduced the Earned Income Credit to the value of €550 in Budget 2016. This has been in operation since January this year and is available to those with earned income who do not have access to the PAYE credit, benefitting small business-owners right across the country.  

The Deputy will be aware that I stated in my Budget speech that I viewed the introduction of this credit as a first step in addressing disparities in the tax treatment of entrepreneurs. However, it should also be noted that there are aspects to the tax treatment of the self-employed which can be beneficial to them. For instance, there are significant timing benefits relating to the payment of tax which, depending on the accounting period used by the taxpayer, are available to the self-employed but not available to PAYE workers. In addition, the expenses regime for self-employed taxpayers remains more liberal than that afforded to employees and therefore the self-employed can actually pay less tax when compared to a PAYE worker on the same income.  

Any analysis of the tax treatment of the self-employed would need to take into account potential benefits of the tax treatment as well as potential costs. However, I would point out that the future direction of tax policy in this area will be primarily a matter for the incoming Government.