+. + Taxation update and summary Prepared for Irish Association for Counselling and Psychotherapy Summary basics on tax and other considerations Types

+

+Taxation update and summary

Prepared for Irish Association for Counselling and Psychotherapy

Summary basics on tax and other considerations

Types of entities – tax and pros/cons

VAT matters

Other useful tax matters

Any questions

+Taxation update and summary The very beginning !

What entity to use ?

Sole trader – non incorporated entity – you are the “business”

Partnership – two or more professionals acting together in business

Company – Separate legal entity from which you as the owner takes a salary

Tax – levied on income less expenses in all cases


The basics

All income earned in a year is subject to tax in that year

Expenses “wholly and exclusively incurred” in generating that income are tax deductible

Section 81 Tax Consolidation Act 1997

Can not claim deduction for personal expenses

Can not claim deduction for capital costs BUT

If functional to business then capital allowances claim possible


Typical expenses

Generally nearly all running costs of an office if separate to your home

Rent/rates/insurance/utilities/cost of support staff/Accountants etc

Also can claim for necessary travel TO/FROM that office to clients but NOT to/from home

Costs of research/cpd courses/conferences claimable also

Capital allowances (12.5% pa) on items such as laptops/office furniture etc


“Home” office – not untypical with many start up or part time business in particular

You can claim for the extra costs as a business expense

Portion of home utilities/ extra ISDN line etc

Bit more care required

Same general principles in relation to whatever business structure is used


Records to be kept

Totally dependent on volume of business

Can be anything from excel spreadsheet through to Sage Line 50 (probably more suitable for companies) / Xero Accounting or Tas Books

All more or less the same

KEY point from tax perspective

Keep all records for 6 years

+Taxation update and summary Types of business

Sole trader

The easiest and most straight forward

Recommend generally keep separate bank account for business income and expenses

Pay tax out of that account too

Transfer “drawings” to own personal account each week or month as appropriate

REMEMBER – tax is levied on Income LESS expenses not necessarily on drawings

+Taxation update and summary Sole trade Accounts for tax

Simple one page Income less expenses = Profits

Tax on the Profit

Tax rates 20% up to €33,800 per annum and 40% on balance

PRSI at 4% and USC at various rates up to 7% generally on all income

SO Effective rate circa 31% on profits up to €33,800 and 51% thereafter

If over €70k then 8% USC and if over €100k then 11% USC


Basis of assessment

Year 1 commencement – assessed on profits from commencement to following 31 December

Year 2 – If only one year end then assessed on profits on 12 months to that date OR

Year 2 – If two year ends in that year OR accounts for less than 12 months then taxed on profits for 12 months to later of those dates

Year 3 onwards – Assessed to 12 months ending on Accounting date

+Taxation update and summary Basis of assessment continued

Cessation:

(i)Last year – from 1/1 to date trading ceased

(ii)2nd last year then assessed on normal year end basis BUT Revenue will assess on actual (jan to Dec ) basis if higher profits

(iii)Short lived business – less than 3 years –assessed profits can not exceed actual profits

Plan tax payments in good time based on estimated profits

+Taxation update and summary Example - Mr A has Income estimated in 2015 of €50k

and expenses are €15k Profits therefore will be 35K. Mr A is single € €

Gross 35,000

Tax €33,800 * 20% 6,760

Balance €1,200 * 40% 480

Less pers credit (1,650)

Tax 5,590

PRSI/USC 11% 3,850

Total 9,440 (9,440) = 27%


In summary Mr A should save 27% of all receipts received each month to pay tax

When does he pay tax ?

For Year end 31/12/14 the key date is 31/10/15 as will be extended if filing online via ROS probably to circa 12th November

On that day:

(i)File 2014 Tax Return and pay balance of tax

(ii)Pay preliminary tax for 2015

+Taxation update and summary Preliminary tax 2015

Must be at least equal to the lower of:

90% actual liability in 2015 OR

100% of liability in 2014

In summary this is very significant date for all self employed persons and must be planned and anticipated in advance

If late filing then surcharge of up to 10% of full liability can arise

If tax underpaid interest charges of circa 9% per annum can arise


How can tax be mitigated

Maximise expenses

Employ spouse/child – great care required and must be bona fide appointment

Pension planning – can claim tax relief of between 15% and 40% of profits when paid as a pension premium depending on age

Deemed income ceiling of €115k per annum

Can pay in 2015 and claim back to 2014 thus producing real saving of up to 41% if on marginal rate AND cash saving on 2015 prelim tax of 40%

+Taxation update and summary In general sole trades are

(i)Easy to set up and wind down

(ii)Little oversight and regulation

(iii)Losses can be offset against other income though be careful of new rules requiring 20 hours per week on average to make it a genuine trade

Disadvantages

(i)No limitation on liability if sued by third parties

(ii)Tax on profit rather than drawings

(iii)Difficult to have a business “asset” to sell on in future


Partnerships

For tax purposes really just two sole traders coming together

NO tax on the partnership as such but an additional Form 1 Firms must be lodged each year

Joint and several liability as between partners for issues in the business

No limited liability and again little bueraucracy

MUST have a partnership agreement setting out how profits shared, future dissolution etc


Limited liability companies

A big step for any sole trader or partnership to take

Creates business asset separate to that of the owners who have a “share” as a % of ownership of that company .

Owners reward is salary/dividends from that company – taxed at source on salary taken BUT

Profits retained in the company are not subject to PAYE etc

Therefore greater flexibility for High earners

+Taxation update and summary A company has limited liability BUT more onerous

requirements in terms of:

(i)Statutory Accounts and filing deadlines

(ii)CRO – Abridged Accounts – balance sheet and notes must be filed to maintain the normal audit exemption generally applying to small companies

(iii)More expense from Accountants

(iv)More difficult to wind up

(v)Can be tricky if two separate owners want go separate ways

(vi)Losses are company losses and can not be offset against personal income


Tax in companies

Same principles as to expense deductibility – wholly and exclusively rule

Salary taxed at source is a deductible expense

Expenses such as travel and subsistence PERSONALLY incurred can be reclaimed tax free from company

WATCH OUT FOR REAL FIXED PLACE OF WORK when making claims !!!

Company pays tax at 12.5% on profits


Greater pension planning in companies – premiums allowed on paid basis

Accounts filed via ROS on CT 1 9 months after year end

Start up exemption may apply if significant Employer PRSI costs but difficult in practice to claim

In general a sole trade or partnership business is best suited to most small practitioners unless there are over riding concerns as to limited liability matters


Practical matters

ROS – Revenue online system

Very useful for registering for tax and paying tax

Use existing PPS number and online TR1 to register as a sole trader

All partners must be registered for Income tax before partnership is registered

Register Business name on CRO website – very user friendly


Trading through a company

Dedicated co sec Firms linked to most Accountants

Can register company within 6 or 7 working days

Must not be too alike an existing company name

Company have business trade name also

Register new company with online TR2 via ROS


Taking on an employee

Taxed at source by you or as appropriate your company

Obligation to register as an Employer

Build in the Employer 8.5% or 10.75% rate of PRSI into costings

Must generally give the employee access to a PRSA provider BUT no obligation to provide a pension

PAYE/PRSI/USC deducted must be returned each month or quarter by you as employer to Revenue


Employee v self employed contractor

Employee is under your direction and control and not in business on own account

Typically in the general medical area all “locums” will be regarded as employees

If work subcontracted to a self employed colleague “in business on own account” then once a valid invoice received and verified and very much isolated then possible to pay Gross

Case by case basis – err on side of caution !


VAT matters !

Depends on

(i) Nature of services

(ii) Turnover

Registration required by any business entity in business making supplies of vatable services for consideration in excess of €37,500 per annum

Election to register if below that limit


Consequences of registration

When issuing fee must indicate fee AND the extra VAT.

You collect the full VAT inclusive fee and pay VAT portion to Revenue on ROS VAT Return every two months

Can claim back VAT on costs

Great care required because VAT is on the Turnover of the business

VAT on medical services leaflet on revenue.ie

Strict medical exempt but psychotherapy in App B – 13.5%


If turnover less than €2 million then cash receipts basis applies

VAT is the main reason for tax audits

Maintain adequate records such as appointment books, point of sale terminals cash register Z totals etc BUT on a proportionate basis

Maintain original invoices of everything that you are claiming back VAT on and make sure invoice issued to you/your business


Other tax matters

If you incorporate then under Section 600 TCA 1997 you can transfer value in your business to a limited company tax free once the only consideration is shares in that new company and NOT cash

Retirement Relief – Section 598 TCA 1997 – if over 55 and had a business or shares in a business for 10 years then once consideration on sale is less than €750 k it may be tax exempt

Other reliefs apply when passing business to next generation including gift tax relief of up to 90%


Tax audits

Driven by likely perceived risk of tax loss by Revenue

Cash business is regarded as key risk area

Must have enough drawings or salary to show you earn enough to live on – of course if part time in business and have other income then this can be taken into account also

Self assessment rules apply BUT always be prepared for the day you may be looked at by Revenue !!


Useful miscellaneous points

A “chargeable person” is a person who is chargeable to tax on income – see Revenue Tax and Duty manuals chapter 41 A

So, starts with every taxpayer and then grants exclusions:

(i)An individual who is in receipt of PAYE source income only

(ii)An individual with some non PAYE income (max €3,174) and coded in to be taxed at source

(iii)Ignore deductions that may apply when arriving at the €3,174

Directors must do a Tax Return also with some exceptions


Other miscellaneous points

Full self assessment

Applies from 2013 onwards

Taxpayer (or their agent) must complete a self assessment section on Tax Return to calculate Tax

Revenue calculation giving indicative calculation and you can then agree or amend

Fail safe on ROS as will not let you file without completing this section

Penalty of €250 if you fail to complete


Miscellaneous

Any claim to maximise use of married tax credits etc must be backed up with substance, contracts of employment, “cash” trail etc

Watch for changes in tax legislation in 2014 compared to prior years

1. Int on loan to invest in a partnership – Section 253 TCA 1997 - No tax relief on interest on new loans after 15/10/13

75% of existing interest allowed in 2014- Interest on loans to invest in companies already phased out


2. One parent family credit

From 2014 onwards generally only one parent can claim

Primary carer – guided by Social welfare payments

Highlight issue now especially to non PAYE client base

3. Incentives – back to work scheme

Long term (> 12 months) unemployed starting new business

Max tax exemption on profits up to 40k per annum


Conclusion

Keep it simple but keep records up to date

Work pro actively with Accountant on ongoing basis to make sure no unpleasant surprises in November

Be aware of tax saving opportunities at a micro and macro level

Plan now for the future

+Thank you

Any questions ?

Alan Lawlor FCCA AITI

[email protected]

Contact on 01 8880830 or 087/9096392

Documents

+. + Taxation update and summary Prepared for Irish Association for Counselling and Psychotherapy Summary basics on tax and other considerations Types