Revenue and Taxation
Tax Information
If you have never been self-employed, paying tax by self-assessment is something you may never have had to think about. The following section will allow you to approach the subject of tax a little more confidently.
Self Assessment
Every self employed individual or company has a legal obligation to make Tax Returns and pay taxes on time.
Income Tax, PRSI and Levies
These taxes apply to self employed individuals and partnerships. With some exceptions, allowances and rates are broadly similar to those for PAYE taxpayers. Important differences for self employed tax payers include:
- A self assessed Tax Return, supported by accounts and full details, must be filed on time every year i.e. 10 months after tax year end. (PAYE Taxpayers, in contrast need only file when requested).
- Taxable profit includes all business income. Allowance is given for expenses incurred wholly and exclusively for business purposes and for depreciation of vehicles and equipment. Some businesses e.g. manufacturers, hoteliers and farmers (and certain businesses in designated areas) get an allowance for depreciation of buildings.
- The accounts (Profit & Loss Account and Balance Sheet) must be based on proper accounting records kept by self employed taxpayer (on computer or manually).
- A Revenue Inspector may call (usually with prior notice) to inspect business records - this usually happens if Revenue suspect a problem, and is known as a 'Revenue Audit'.
- A substantial payment on account (known as 'preliminary tax' and usually equal to the prior years tax), must be made during the tax year in October, with the balance payable after the end of the tax year.
- Preliminary tax can also be paid by monthly instalments during the tax year by direct debit. Preliminary tax need not be paid in the first year of a new business, but the promoter has to 'catch up' on payments in the second year.
- Registration Forms are available from www.revenue.ie and can be used to register ‘Persons’, i.e., Individuals, Partnerships, Trusts or Unincorporated Bodies for Income Tax, VAT, as a Principal Contractor for Relevant Contracts Tax, and as an Employer for PAYE/PRSI.
Forming a Company
Many businesses operate as limited companies, to protect the promoter's personal assets (e.g. the house) in the event of business financial difficulties. However, running a company involves extra costs, so most small businesses start as sole traders or partnerships.
Company profits (with some exceptions) are taxed at only 12½%, provided the profits are not withdrawn from the company. Profits withdrawn to fund the promoters' personal expenses are taxed at the normal personal tax rates. It is usually worthwhile forming a company for tax reasons alone if profits are above €60,000 p.a.
A company must register for corporation tax within a month of commencing business.
Value Added Tax
You need to:
- Find out the rate of VAT on the goods or service you provide (from an Accountant or from the Revenue website).
- Register for VAT if annual turnover will exceed €75,000 if selling goods or €37,500 if supplying services.
Charge VAT to customers on top of your price (for retail sales, allow for it in the price). - Every 2 months, pay Revenue the difference between VAT charged to customers and VAT charged to you by suppliers (if you sell less than you buy-e.g. in the first 2 months-this can mean you get a refund).
Instead of settling up every 2 months with Revenue, you can do so annually, but in the meantime paying an agreed monthly direct debit (on account).
PAYE/PRSI
If you have employees, you must register as an employer. (If you have a company, remember you are an employee of the company). You must deduct the appropriate amount of Tax and PRSI from your employees, and pay it over to Revenue monthly - or settle up annually with a monthly direct debit in the meantime.
Withholding Taxes
' Relevant Contracts Tax' must be deducted from payments to sub-contractors by a range of businesses (e.g. builders, developers, forestry operators). The tax is then paid over to Revenue monthly. There is a tax clearance procedure to avoid such deductions which Revenue operate on a very strictly controlled basis. 'Retention Tax' is deducted by state bodies from fees paid by them, but there is no clearance procedure. In both cases, credit is given in the year end tax assessment for such tax deducted.
What should I do?
The Revenue Commissioners do not consider lack of knowledge as a valid reason for delays, and have extensive powers to levy interest and penalties. The tax system is complex, so the information given above can't be comprehensive. You will need the services of an experienced professional accountant for specific advice on your situation. Early tax planning can maximise your entitlements and minimise your payments. Then if you keep good business records, and pay taxes on time, tax problems won't divert your attention from the main issue of growing your new business!
Further Information
The author B.J. Carroll is a chartered accountant and may be contacted at http://www.kinnear.ie/ or 044-9341421
The Revenue Commissioners website at http://www.revenue.ie/ has extensive information and brochures to download.
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