We’ll have a look at Company Taxes – The Basics, so please stick with me as it’s a hard sell. The best way to do this is by using an example to run through the basics. This will help you stay awake. Trust me on this one. Let’s delve into
- Introduction
- The Agenda
- The Meeting
- Summary
Introduction
Don Aldridge runs a successful accountancy business called Aldo DJC. The J and the C come from his two sons, Juan and Con. The business is in a company called Donaldo Ltd. That company was set up in 2004 and has seen good times and bad too.
Don is a colourful character. With flashy ties and colourful socks, dapper Don dresses to impress. He gets noticed. But behind that colourful exterior is a serious businessman. Unlike Garth Brooks, Don has friends in high places. He’s a man to get deals done. Businesses bought and sold or transferred to the next generation. As a result, the profits of Donaldo Ltd are strong
| Year ended 31 December 2022 | €1,000,000 |
| Year ended 31 December 2021 | €800,000 |
Included in the final profit number for 2022 is a rental profit of €50,000. The company bought a commercial property in Bray at the end of 2021.
Mary O’Brien is the tax lady in Aldo DJC. She loves her job and the buzz at this time of year. Corporation Tax [CT] season. Her favourite job is the Pfizer CT return. She loves telling her colleagues that the Pfizer taxes are rising! The one meeting she dreads is the annual sit down with Don to run through the company taxes. That meeting is in her calendar for next Wednesday 30th August at 12 o clock. Time to get into the zone.
The Agenda
Before the annual meeting with Mary, Don does up the agenda. He has the usual questions like
- What do we owe for 2022?
- How much should we pay on account for 2023?
- What will the surcharge be for 2022 that we pay in 2023?
- Have we withholding tax to claim for 2022?
- Is there income tax owing for 2022?
- Can we do better in certain tax areas?
Mary gets the agenda into her e-mail on Thursday the 24th of August. This annoys her a bit as she’s up to her eyes with CT returns. There’s always a question that puts her on edge and this year it’s number 6. She’s thinking that the company is making a million euros and I didn’t get a pay rise this year. Brushing away the negative thoughts, she gets cracking and pulls the numbers together.
The Meeting
The first thing Mary notices is the Donald Duck tie that Don is wearing. It drives her cracked, but she smiles, and they sit down for a coffee and a chat. Don chats and Mary listens. At least the coffee is good. She presents the numbers for 2022.
| Trading Profit €950,000 x 12.5% | €118,750 |
| Rental Profit €50,000 x 25% | €12,500 |
| Surcharge for 2021 | €52,500 |
| Income Tax owing | €2,800 |
| Total | €186,550 |
| Less Withholding Tax | €17,500 |
| Final Tax Liability | €169,050 |
| Preliminary Tax Paid | €160,000 |
| Balance Due | €9,050 |
Don mulls over the numbers but has no doubts they are accurate. He knows Mary is sharp. He has a fair idea of the answers but asks some questions, just for clarity in his head.
When to pay and file the return?
The balance for the year ended 31 December 2022 is due on the 23rd of September next. 9 months post year end and by the 23rd of that month. This is on the basis that the company met its preliminary tax requirements. Donaldo Ltd did, so it must file its CT return [Form CT1] and pay the balance of €9,050 by the 23rd of next month.
The actual filing deadline is the 21st of next month but when you pay and file together on ROS you get an extra 2 days. If the return is late there is a surcharge. 5% if filed within 2 months of the deadline and 10% outside of 2 months. That deadline runs from the 21st of September and not the 23rd, so be careful on that one. Surcharges would be
| €169,050 x 5% | €8,453 |
| €169,050 x 10% | €16,905 |
We won’t be paying that thinks Don.
Pay on account for 2023
To meet its preliminary tax obligation for 2023 the company must either:
- Pay 100% of the previous year’s liability or
- Pay 90% of the current year’s liability.
Given they know the final bill for 2022 is €169,050, they decided to make a payment of €170,000. This payment must go to Revenue by the 23rd of November 2023. The due date is the 23rd of the month before the year-end date. For example, if the year-end was 31 January 2024 the preliminary tax date is the 23rd of December 2023.
If you don’t pay on time Revenue can charge you interest at a daily rate. Provided the funds are there, it makes sense to pay using the 100% rule, especially when profits are rising.
Income Tax for 2022
Don is a bit confused about the Income Tax payment of €2,800. How did you come up with that number? Two reasons Mary replies.
| TRS medical insurance €200 x 4 | €800 |
| Tax on loan €8,000 x 25% | €2,000 |
| Total | €2,800 |
The company pays the VHI premiums for Don, Maura, Juan and Con. As they are all adults, the tax relief at source is €200 per adult. Don pays BIK on the VHI premiums.
Mary looks forward to explaining the next bit. Don, you took more money from the company than you should have. At the end of 2022, you owed the company €8,000. Don remembers borrowing €8,000 for a down payment on a soft-top Porsche for Maura. It was coming up to Christmas and it was the easiest way to get funds at the time. The company must pay Income Tax on that loan at 20%.
| Loan grossed up €8,000/8 x 10 | €10,000 |
| Income Tax 20% | €2,000 |
If Don repays the loan before the 23rd of September next, then the company doesn’t have to pay the Income Tax on it. He tells Mary he’ll repay it in December. When he does the company can get a refund of the Income Tax deducted. They’d get that refund when filing the 2023 CT return.
Surcharge for 2022
Professional service companies pay a surcharge on their profits. This increases their tax rate from 12.5% to close to 20%. There’s a list of professions published in Revenue Guidance. Included are
- Accountants
- Auctioneers
- Computer Programmers
- Dentists
- Doctors
- Engineers
- Opticians
- Solicitors
For 2022 Mary calculates the surcharge as follows.
| Trading Profit | €950,000 |
| Less deduction for CT 12.5% | €118,750 |
| Net distributable amount | €831,250 |
| 50% of net amount | €415,625 |
| Tax at 15% | €62,344 |
Mary informs Don that there’s also a surcharge on the rental profit for 2022. His mood is not as upbeat with all these surcharges. He is thinking to himself “Where’s the good news”.
| Rental Profit | €50,000 |
| Less deduction for CT 25% | €12,500 |
| Net amount | €37,500 |
| Deduction trading company 7.5% | €2,813 |
| Net distributable income | €34,687 |
| Surcharge at 20% | €6,937 |
Can we do better?
Always a loaded question thinks Mary as Don expects there to be some positive news. Finally! She has some suggestions.
- Take a dividend before the 30th of June 2024 to avoid the surcharge on the rental profit.
- Meet before the end of June 2024 to look at the 2023 numbers to review bonus options.
- Is Don maximising his pension payments through the company?
- Could Maura earn more at the lower rate, or the company set up a pension for her?
If Don takes a dividend of €32,687 within 18 months of the 31st of December 2022, there will be no surcharge on the rental profit. That figure isn’t a typo as there’s no surcharge if the next distributable income is €2,000 or less. It’s not that tax efficient as the company must deduct Dividend Withholding Tax [DWT] at 25%
| Gross Dividend | €32,687 |
| DWT | €8,172 |
| Net payment to Don | €24,515 |
Mary suggests Don take this in early 2024. With the net payment, he can refund €8,000 to clear off his loan. Don will pay Income Tax on the gross dividend in his 2024 Tax return. He would need to file his Tax return by the 31st of October 2025.
Mary isn’t a huge fan of dividends. She thinks Paschal and Michael get too much money from them. They get the DWT and then get more Income tax on top. She prefers salary or bonus. The company will get a tax write-off at 20%, even though Don pays 52% on the extra salary.
Setting up a pension for Maura makes sense too. It will help the Aldridges maximise lower rate bands at retirement.
Summary
The purpose of the blog isn’t to frighten you about your company taxes. You don’t need to understand how to arrive at the liability. That’s our job. Most company taxes are straightforward. I wanted to give you an idea of the dates and amounts you need to pay. Getting your taxes paid on time and all tax returns filed on time is important. This cuts out Revenue getting more from surcharges and interest.
Larger companies will have more going on and have different preliminary tax rules. But their filing dates will be the same as above. It makes sense to have a quality bookkeeping process in your business. You know your numbers early and know they are right. Accounts are ready shortly after the year end. That’s good for tax planning, but also to meet your filings with the CRO, and for bank funding, etc.
The key message is to know what your final tax liability is for last year. That will determine your preliminary tax payment for the current year. When you know what liabilities are coming and when they are coming you can plan for them.
Don is very happy with the meeting even though the liabilities are increasing. He gives Mary a high five. Mary is singing “What’s another year” to herself. And thinking that when Don is dishing out the bonuses to himself next year, he might think of her. And pigs will fly!
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