I had a meeting this week with Bridget Higgins who is starting a new business. Already working, this is a new gig for her, and she wants to get things right from the start. It got me thinking that we didn’t write anything about this before. Plus, it could help to point you in the right direction when starting your own business. We will look at
- Background
- Telling Revenue
- Self-assessment
- Expenses to claim
“No Income Tax, No Vat
No money back, no guarantee
We’ll cut prices at a stroke
God bless Hooky Street” John Sullivan – Only Fools & Horses
Background
Bridget is a whizz. Working for the HSE full-time isn’t her passion. She loves the beauty industry and spent the last year doing a course on aesthetics. I could see her examining the many wrinkles on my furrowed brow. Thinking that fella is past help! Her plan is to make the women of Dunmore even more beautiful than they already are. She sourced a premise on 1 Lucky Street, Dunmore. The business name will be C’est Magnifique.
Sole trader or company
Husband Henry wanted her to set up a company and she wasn’t sure if she should be a sole trader or trade through a company. She would be doing this part-time to build up her experience and to get her name out there. Year 1 would be very much let’s see how we go and build from there. Her thinking is that the new business would turnover €600 a week in the first year before expenses. The long-term plan is to leave her position with the HSE and give all her time to C’est Magnifique. So, the decision was sole trader in the first year and see how business improves after that.
I thought this decision made sense. While I love the flexibility that a company gives, a sole trader makes sense for a part-time business. Especially one in the early stages and uncertainty about the level of sales. The downside of being a sole trader for Bridget will be her tax rate. All her profits will suffer tax at close to 50% given that she earns more than €40k with the HSE. But as she’s only starting mid-way through the year then profit in 2023 will be low enough. Plus, we can claim some extra expenses.
All good to know but Bridget’s main concern was Revenue. What did she need to do with them and how?
Telling Revenue
First things first, telling Revenue that you are starting a new business is easy enough. You tell them by registering for tax. That’s filling in a paper form or going through the e-registration process. The questions are straightforward but you will need to be careful on some of them. These include
- Personal Details
- Legal format. Sole trader or partnership.
- Turnover in the first 12 months
- Year-end date. The date you prepare accounts for
- Start date
- Taxes you are registering for
- Renting your business premises
Personal Details
Have the PPS numbers ready here lads. If you are married or in a civil partnership, then they want the PPS number of your spouse or civil partner too. Bridget will include Henry’s PPS number. All the other usual personal details are here. Names, dates of birth, addresses and contact detail so Revenue know where you are and can contact you.
Turnover in the first 12 months
Exactly as it says on the tin. What do you think your sales or turnover will be in the first 12 months? For Bridget her estimated turnover is €600 per week. Let’s assume that’s for 50 weeks so her turnover in the first 12 months will be €30,000. This number is important for taxes like Vat. Bridget is providing a service. The Vat registration threshold for services is €37,500. That’s just over €3,000 per month so watch that number.
Year-end date
We would recommend 31 December. It is in line with the calendar year and tax year. If comparing numbers from one year to another it’s easier when it’s a calendar year. Plus, it doesn’t cut across Vat periods and is easiest from a payroll point of view, too.
Taxes you are registering for
Bridget is registering for Income Tax. She’s not registering for Vat as she’ll be below the vat registration threshold. Neither is she registering as an employer for PAYE/PRSI. She won’t have any employees.
Other taxes are RCT if you are in the building trade or CGT if you sold an asset.
Renting your business premises
Revenue want the name and address of the landlord and the amount of rent you are paying. And the frequency of payment plus the date you started paying rent and how long the lease is. You’ll be claiming a deduction for the rental expenses. Revenue will keep an eye on the landlord and expect to see rental income in his/her tax return.
Other
Other questions to watch out for on the registration form are
- Accountancy package or software system. A shop might have an EPOS system. The accountancy packages we use for bookkeeping are Dext & Xero
- Bank details. Great if you have a separate business bank account. Would recommend this to keep business and personal separate. If you don’t have one, leave it blank for now but update it on ROS at a later stage when you do.
- Advisor details. This is the name, address and contact details of your accountant or business advisor.
- Type of business. Bridget will tick “service and other” here as she’s providing a beauty service
- Percentage sales online anticipated. Plus, your website address.
In Bridget’s case, as she’s only registering for Income Tax, the form is straightforward. But, if you are registering for other taxes, especially Vat, then get help from your advisor. Vat can be tricky, and Revenue are reluctant to give out Vat numbers without all the i’s dotted and t’s crossed.
Self-assessment
As Bridget has registered for Income Tax, she’s now in the self-assessment system. That puts certain obligations on her like
- Filing an annual Income Tax return and
- Keeping proper books and records to prepare accounts
The accounts numbers will be in her annual tax return that she must file each year. Her first tax return will be for 2023 and she has until the 31st of October 2024 to file that and pay the tax owing.
We would always suggest completing your tax return early in 2024. The benefits of that are
- She’ll know what her tax liability is for 2023 early and can plan for the payment later in the year
- Plan for preliminary tax for 2024. When you are in the self-assessment system you can pay preliminary tax based on the previous year
- Take steps to reduce the 2023 liability even more by making a pension contribution. This can have a double benefit. Reduce the 2023 liability and reduce the 2024 preliminary tax payment.
Bridget has a pension but didn’t contribute to it in a few years given that she’s in the HSE pension. She can contribute in 2023 and 2024 and get tax relief at 40%. The best option for her is to wait and see what her profit will be for 2023. That will determine how much she can pay into her private pension.
Useful Tips
Do everything online through ROS or MyAccount if you can. There will be extensions to the deadline when you pay and file through ROS. That deadline extension is usually 2 weeks after the 31st of October. It’s not a deadline you should be aiming for. It’s way less stressful when you do the accounts and tax return early in the year. Easier for us too!
The key is not to miss any deadline. You registered your business for taxes so Revenue expect to get a tax return from you and to get paid too. Don’t be late. You’ll end up paying more with surcharges. Worse still, you are bringing yourself to Revenue’s attention. “Hello Mr. Revenue, please take a closer look at my numbers”.
Expenses to Claim
Expenses to claim for Bridget will be
- Rent
- Product purchases
- Cost of registering the business name
- Electricity
- Phone
- Courses
- Insurance
- Uniform of business but not clothes
- Advertising
- Bank charges
- Comerford Foley consultation fee
- Subscriptions for Institute
- Repairs and cleaning costs
- Training
An expense that Bridget mentioned in our meeting was a course that she did that cost her €3000. She did this in 2022. There is relief for pre-trading expenses once the cost is within 3 years of the date you start your business. As a result, Bridget will get a deduction for the course fee of €3000 in her first accounting period.
Bridget plans to buy a Laser machine for €8000. She can’t claim that as an expense as it is an asset. She can get Capital allowances on it at 12.5% per annum.
Let’s look at some numbers for C’est Magnifique for 2023 to see how things would look.
| Sales [30 weeks at €600] | €18,000 |
| Less cost of sales – products | €2,000 |
| Other expenses | €5,000 |
| Pre-trading expense | €3,000 |
| Net Profit | €8,000 |
| Capital allowances [7 months] | €583 |
| Taxable Profit | €7,417 |
| Less pension payment | €1,854 |
| Taxable Profit | €5,563 |
| Tax Payable 48.5% | €2,698 |
Pension
Young Bridget is only 45 so she can put 25% of her taxable profit into a pension. That is €1,854 [€7,417 x 25%]. The key here is to pay that before 31 October 2024 and to claim it on the tax return.
Useful tip
Given that Bridget is in the self-assessment system she can pay preliminary tax for 2024. She won’t have to pay preliminary tax for 2023 as that is her first year of trading. But she will for 2024. Her tax payments by the 31st of October 2024 will be
| Balance of Income Tax 2023 | €2,698 |
| Preliminary Tax 2024 – 100% | €2,698 |
| Total Tax due | €5,396 |
When it comes to filing her tax return for 2024, in 2025, she has €2,698 paid on account. Let’s assume the 2024 liability is €5,000. She has paid €2,698 so owes the balance of €2,302. As she has paid enough preliminary tax that balance isn’t due until the 31st of October 2025.
If she doesn’t pay the correct amount of preliminary tax and files her tax return early in 2025, Revenue would look for the balance at the time of filing the return.
Do things right and don’t end up with C’est Magnifique on Hooky Street.
The information above was very specific to Bridget’s circumstances and may not be suitable for your new business. Please get the right advice from your advisor.
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