Good tax compliance is so valuable. It has never been as important as it is now. That sounds like something the Chairman of the Revenue Commissioners would say! True, but from a practitioner’s viewpoint we can see the value it gives to clients.
In this, we will outline some examples of good tax compliance and show the benefits. We will compare this to situations where tax compliance isn’t so good, and you’ll see some of the downsides. We’ll focus on
- Income Tax Returns
- Good Tax Compliance
- Poor Tax Compliance
- Company Director
- Tax Clearance
- Summary
Income Tax Returns
File your Income Tax Returns on time, every time. No excuses. You have 10 and a half months from the end of the tax year to do it. You know you have to do one, so get it done and move on.
Doing it early doesn’t mean you have to pay early. Once you have met your preliminary tax requirements, you won’t have to pay until the end of October. Those kind souls in Revenue even allow a two-week extension till mid-November once you pay and file on ROS.
Knowing what your tax liability is early in the year gives you time to have the money set aside. Plus, there are some planning tips too to help you reduce the liability or get extra cash together.
Good Tax Compliance
Don Murphy is a man who knows about good tax compliance. He’s a director of his own company and has 2 rental properties. Don must file a tax return every year and he likes to wrap up his company and personal returns by the end of June. The reason for that is personal and company are related. What he decides to do with the company will impact personal taxes.
Don’s two properties have a profit of €20,000 which results in a tax bill of €10,000. He sees the two properties as his pension. He’s using the rental profits to pay down the remaining mortgage quicker. The plan is to pay off the mortgage before the kids go to college. Don will be auctioning a kidney in two years to pay for student accommodation. While he has some savings, he doesn’t want to use those to pay the tax bill.
So, the plan is to use the money in the company to pay the tax bill. Before the end of June 2023, he takes a bonus from the company.
| Company Bonus | €20,833 |
| Tax Liability 52% | €10,833 |
| Net cash after tax | €10,000 |
| CT deduction for bonus | €4,167 |
| Net Tax cost | €6,666 |
Benefits for Don
By taking the bonus within 6 months of his company year-end that bonus can go into the 31 December 2022 accounts. The benefit of that is that he’ll get a corporation tax deduction for 2022. The reason it’s a 20% deduction is that his company is a professional services firm. The rate is still 12.5% but the professional services surcharge increases that to close to 20%. As a result of the bonus the CT liability for 2022 will reduce by €6,666.
Don’s thinking is “Sure the money is in the company so why not take it out so I can hold onto what I have”. The main benefits for Don are
- Filed his Income tax return early before his summer holidays
- Has the money to pay the tax so pays it to Revenue. Otherwise, he’ll be looking at it for the next 5 months
- Doesn’t use existing savings to pay the tax liability
- Can use the rental profits to pay down the mortgage early saving significant interest
- Confidence, like the A-Team. He loves it when a plan comes together
- Reduced the CT liability in his company
- Headspace to focus on his business and not worry about upcoming tax returns and tax bills.
Poor Tax Compliance
Unfortunately, we have seen some examples of poor tax compliance with new clients. Tom Dillon booked an initial consultation with me in June. Tom lives and works in the UK but is originally a Tipp man for his sins! He bought a house in Clonmel for €70,000 in 2014 and was thinking of selling it. The purpose of the meeting was to look at the Capital Gains Tax cost if he was to sell.
Tom was aware of the CGT relief for properties purchased from December 2011 to the end of 2014. He thought the current value of the property would be €220,000. Without the CGT relief, the liability would be
| Sales Proceeds | €220,000 |
| Less Costs of Sale | €5,000 |
| Net Proceeds | €215,000 |
| Less Cost of property | €70,000 |
| Cost of purchase – legal & stamp | €3,000 |
| Gain | €142,000 |
| Less Exemption | €1,270 |
| Taxable Gain | €140,730 |
| Tax payable 33% | €46,441 |
If Tom can get the relief, then 7/9th of the gain isn’t taxable. The max relief is 7 years, and his total ownership period is 9 years, from the end of 2014 to the end of 2023.
| Gain | €142,000 |
| CGT relief 7/9ths | €110,444 |
| Net Gain | €31,556 |
| Less Exemption | €1,270 |
| Taxable Gain | €30,286 |
| Tax payable 33% | €9,994 |
All is not lost
As you will see there is a CGT saving of €36,500 if Tom can get the relief. But one of the conditions to get it is that the owner of the property returns the income to Irish Revenue. Tom declared the income in his UK tax returns but not here. So, he doesn’t qualify for the relief. A costly error. All is not lost for Tom though. We do a catch-up exercise for him and prepare and file his Irish Tax returns for 2015 to 2022.
Seven of the eight tax returns that we file are late so there is an automatic 10% surcharge. This can run into thousands over 7 years. Revenue can also charge interest and that is 8% per annum. Thousands more on top of the surcharge. Despite all the costs, the benefit of the tidy-up still significantly outweighs the tax and the add-ons.
Company Director
If you are a company director who owns more than 15% of the share capital of a company, then you must file a Tax return. If you don’t, the surcharge is more expensive than for a non-company director.
We got a new company client earlier this year. We did the accounts and the corporation tax return. Bill who owns 100% of the shares in the company was “looking after” his own tax return. In a conversation with Ger, Bill mentioned that he had a few tax returns to catch up on. With alarm bells and sirens going off in Ger’s brain, the question was “How many is a few?”
Bill wasn’t sure so Ger took the bull by the horns and linked us to Bill’s Income Tax on ROS. When you see red on the ROS screen you know you are in trouble. Bill hadn’t filed a tax return since 2018 so 2019, 2020, 2021 and 2022 were outstanding. He wasn’t a company director in 2019 and 2022 isn’t late yet. 2020 and 2021 will be the years that will cause pain.
Revenue Guidance
The following two sentences are from the Tax & Duty Manual “Surcharge on late returns by directors”.
- Directors who are required to file a self-assessment return are liable to pay a surcharge if the return is not filed on time.
- The surcharge will be based on their income tax liability before credit for tax paid under the PAYE system.
That’s the killer. The surcharge is before a deduction for PAYE paid. So, the higher the earnings the greater the surcharge. Looking at some draft numbers for Bill his surcharges are
| 2020 | €3,375 |
| 2021 | €3,100 |
| Total | €6,475 |
Bill has a very small tax liability for 2020 of €75. A non-owner director would pay a surcharge of 10% being €7.50. I’ll leave Ger to break that news to Bill.
Watch out for spouses
Be careful and watch out for spouses. Where you are jointly assessed, and your spouse or civil partner is an owner-director the surcharge will apply in that case too.
I am on a roll here with all the bad news! It’s like the film The Good, The Bad, and the Ugly. The surcharge is definitely the ugly.
Tax Clearance
Tax clearance is a brilliant thing to have. It was so valuable during the pandemic. You had to have tax clearance to qualify for the different wage subsidy schemes. Add to that
- Grants
- Tax refunds
- RCT Deduction rates
- Tax reliefs
- Government Support schemes – BRSS, CRSS, TBESS, etc
A company that has all its taxes up to date may still not get tax clearance. Revenue will look at the company directors as they must be tax compliant too.
Rest assured that to get new tax reliefs, like mortgage interest relief, you will need to file a tax return. They won’t give you the money if there are tax returns hanging out there.
This doesn’t only apply to Income Tax returns but other taxes like VAT returns too. The VAT return of trading details [RTD] is one such form. A bit of a pain to complete it but boy will you pay if you don’t.
Unfortunately, we are now back to the bad old days with Revenue. They will cancel your tax clearance at different times during the year. You may not even know unless you are a regular ROS visitor.
Summary
Good tax compliance has never been so valuable. To have that is an investment in you and your business. It keeps Revenue happy; you pay what you owe and no more. Plus, it gives you the confidence to focus on your business. No stress makes a happy gent or lady. You are not worried if Revenue come calling and you can give them whatever they need. If you invest in your bookkeeping that can be at the touch of a button.
Some can do this themselves but not too many. Don’t cost yourself time and money by getting it wrong and being late.
Reduce your stress by letting us look after you and your business to keep Revenue on your side. Start here
