The first records of taxes in the world date all the way back to ancient Egypt, at a time when they didn’t even have a currency, and would pay their taxes with goods or labour. The Greeks then used taxes to fund their wars, but typically took from the rich, and refunded them with the spoils of war. The concept of income tax was first introduced by the British in 1798 to fund the Napoleonic Wars, and although it was abolished in 1816, it was brought back for good in 1842, and the world has been grumbling ever since.
It’s safe to say that taxes have never really been anyone’s favourite thing, but at least in ancient Egypt, they were a lot easier to calculate. In the modern world, people literally devote their lives to figuring out the ever-changing, increasingly complex systems that vary from place to place, and industry to industry. With that in mind, here are 10 things we all hate about business tax returns.
1: Income Tax/USC/PRSI
If you are the director of a company, the exact amount of income tax, USC, and PRSI you will pay may vary slightly. If you are an owner-director, you would be classified as self-employed (Class S), paying the standard rate of income tax, as well as 4% PRSI, and up to 7% USC.
If you are a non-owner director, you will most likely be classed as an employee (Class A), paying income tax, 4% PRSI, and USC of up to 11%, depending on how much you take home. As a non-owner director, your company will also pay either 8.7% or 10.95% PRSI, depending on whether you earn below or above €386 a week.
As either an owner or non-owner director, you can shelter a certain amount of your earnings from tax by putting them into a pension fund. The cap is 15% of earnings for people aged up to 29, which gradually increases to 40% by age 60.
One of the most common taxes there is, Value Added Tax (VAT) is applied to most goods on the market, with several different VAT rates, which depend on the good or service being sold. There are a few thresholds for annual turnover that determine when a person is required to register to apply VAT, but the two most important figures to remember are €37,500 for services only and €75,000 for goods.
If you are required to register for VAT, you are then tasked with applying the correct rate of VAT to your goods and services. Unfortunately, this can be a bit of an arduous process, as you pretty much need to check each item individually. Luckily, Revenue has a comprehensive and easy-to-use database where you can quickly search products and see the correct rate of VAT to apply.
3: Relevant Contracts Tax
The relevant contracts tax is a form of withholding tax, which is a tax that is paid to the government by the issuer of payment, not the recipient, similar to employer’s PRSI. In the case of relevant contract tax, it must be applied by primary contractors making certain payments to subcontractors in the forestry, construction, and meat-processing sectors. There are three rates of tax (0%, 20%, 35%), but which is used actually depends on the tax compliance of the subcontractor. Therefore, the primary contractor must use the Revenue Online System to determine which rate to apply.
4: Dividend Withholding Tax
Another form of withholding tax, the DWT is applied to dividends and other payments made by Irish resident companies to the shareholders. There are a small number of rules about when DWT should be applied, but in general, it is applied to all cash and non-cash dividend payments, with exceptions for things like pension contributions. The recipient of the payment may then be able to claim a tax credit or refund if they meet certain criteria.
5: Professional Services Withholding Tax
The last form of withholding tax we’re going to look at here is the professional services withholding tax, which is a 20% deduction taken from payments paid by a state or semi-state body to certain professionals. The recipient of the payment can then claim a refund when filing their end of year returns. For a list of the professional services to which this applies, click here.
6: Automatic Late Fees
Although Revenue understands that tax liabilities fluctuate, and therefore it is not always possible to predict the exact amount due, but at least 90% of PAYE, PRSI, USC, AND LPT must be paid on time, as must at least 80% of VAT. Anything below this would qualify as a late payment, and incur an interest rate of 0.0274% for each day that payment is unpaid.
7: Preliminary Corporation Tax
Preliminary corporation tax is an estimate of a business’s tax expected liability for the following year, combining income tax, PRSI, and USC. Although new companies that qualify as “small” (their tax liability being under €200,000) are exempt, this is still a very frustrating tax for people who are new to business; overpaying can mean waiting for a refund, which Revenue won’t be issuing at the speed of light, while underpaying can mean incurring interest charges of 0.0219% a day.
PCT can be estimated by paying 90% of the tax due in the current year, 100% of the tax due the previous year, or 105% of the tax for the year before that (only payable via direct debit).
This is a tax that can trip up people who may be new to business or not too familiar with the tax system. A benefit-in-kind is any non-cash benefit given to an employee, such as a company phone or car. Although there is a one-off exemption of benefits-in-kind worth €500 or less, any non-cash benefits given to an employee earning above €1,905 a year are taxable, based on the value of the benefit.
Please note that the exemption of up to €500 is a ONE-OFF of up to €500. That means if you give two separate gifts worth €250, one of them must be subject to tax.
If numbers have never been your strong point, then bookkeeping will be one of your least-favourite aspects of entering the business world. But bookkeeping can quite easily bring down a potentially successful business if it is done badly, so if this is an area in which you struggle, be sure to take the time to read out blog on the most common bookkeeping mistakes.
10: Archiving Records
Many people might put this in the same category as bookkeeping, but the process of bookkeeping has been around for thousands of years, yet the standards have recently become much higher. Now that we are able to cheaply store an essentially limitless amount of information, the quality that is expected of our records has gone up dramatically. More importantly, you should plan for these standards to keep rising.
At the moment, you are required to hold all bookkeeping records for 6 years. But it is perfectly possible that in 20 years time, you will be expected to provide records of transactions occurring today, so find a suitable form of online storage, and get into the habit of keeping the best records you can.
The tax system is many things, but simple is not one of them. But as complex as it may be, paying the correct tax is one of the most fundamental aspects of making your business a success. A genuinely innocent mistake could come back to haunt you at any point, so as much as we may hate them, calculating your business tax liabilities is something that will always be worth the necessary time and effort to get right.