small business and taxes

J

jetts

Guest
My business partner and I run a small manufacturing business, ltd for about 2 of the last 4 years. At the moment we don't employ anyone.The business has been quite successful with the result that we are facing a corporation tax bill of about €6,000, a bit much for 2 carpenters.We only draw down an average salary but we contribute about €18,000 to a pension(combined).
Our accountant did not advise us adequately as how to avoid this tax bill, I did tell him months before the kind of figures we were doing.We really need advice about how to avoid this situation and with regard to tax and investing, have a plan to develop the business in the long term.

advice appreciated
 
Hi jetts,

Obviously nobody likes paying taxes, but it is important to remember that taxes are a fact of life for small businesses such as your own. While tax planning and (legal) tax avoidance measures are useful, in general terms, in minimising tax liabilities, it is pretty much impossible, in most situations, to (legally) prevent some sort of tax liability arising if a company or small business is making profits.

It is also important to remember that, sometimes, in tax planning, "the cure may be worse than the disease". For example, a manufacturing business can decide to invest large sums in new machinery on a regular basis to generate capital allowances that are deductible against corporation tax. The company will definitely save tax (maybe in full) by doing so. However, this option may not be a good one for the company, as the costs of additional financing and writeoffs on existing machinery may heavily outweigh the tax saving.

It is very difficult to comment on the specifics of your case except that to say that, (at the current corporation tax rate of only 12.5% of their profits) Irish small companies, in general terms, are not facing the crippling tax bills that their equivalents faced here a decade ago or that their counterparts in unincorporated businesses in Ireland are still dealing with.

In that context, Corporation Tax bills of around €6k should only arise if the business has taxable profits (after all deductions, including directors' salaries, and capital allowances) of €48K. Normally if a small comany is making profits of this order, paying a tax bill of €6k should not be a massive problem (cashflow permitting) for the company. Remember, if a self-employed individual earns such income on top of normal "take home" drawings from the business, they will be paying income tax of up to €20k on this income.

Finally, if you are not happy with the levels of service or quality of advice offered to you by your accountant, it is time for you to discuss your concerns with him/her or to shop around for another accountant to do this work for you. (For a start, you should ask yourself are your pension arrangements structured in a way to maximise tax relief). However, it is vital to remember that an accountant is not a magician and you cannot expect your tax bills to totally disappear, even if you are dealing with the best accountant in the world.

Tommy
www.mcgibney.com
 
A tax bill of €6k between two people sounds like something out of a fairy tale if you are a PAYE worker!
 
Hi tedd,

There seems to be still some sort of myth out there that self-employed people and company directors pay less tax than PAYE workers. In fact, it's not the case, and you could more credibly argue the opposite, as PAYE people can claim the same tax bands and credits as the self-employed but the self-employed can't claim the PAYE allowance.

Some of the myth is based on statistics available from the annual Revenue Reports, which state that the average self-employed person pays €x,000 less in tax each year than the average PAYE earner. However, these statistics are badly distorted by the fact that most high-profitmaking self-employed people incorporate themselves as limited companies to avail of lower corporation tax rates. Their personal earnings then are categorised, in the statistics, into either (i) corporate earnings or (ii) directors salaries which are included in the PAYE-earners figures.

As incorporation is not really worth the hassle for self-employed taxpayers on modest earnings, its not really a surprise that the average per-capita tax take from the self-employed doesn't really increase much over time. The modestly-profitable self-employed taxpayers stay within that sector year-on-year, the booming ones end up joining the "PAYE sector".

Strange but true - Tony O'Reilly and Michael O'Leary are probably "hardpressed" PAYE taxpayers - wonder if SIPTU will let them join??

Tommy
www.mcgibney.com

ps In jetts' case, don't forget that (s)he and their partner will also be paying PAYE on their salaries from the company, in addition to their corporation tax bill on the remaining surplus.
 
Apologies for my previous comments which appear to have caused a great deal of offence.
tedd
 
Hi tedd,

no need for you to apologise, at least from my point of view. You expressed a reasonable opinion and you are definitely correct to express it, even if I don't agree with it.

best regards,

Tommy
www.mcgibney.com
 
Tommy,

Thanks for your kind remarks.

I also received an anonymous private message from an unregistered contributor who was offended.

My comments were a bit tongue-in-cheek but I can see how it could be seen as offensive.

Regards
tedd

ps Contributors who want to use the private message facility to criticise contributions privately should really <!--EZCODE BOLD START--> register<!--EZCODE BOLD END--> as a user because as a general rule I think it's only fair to allow the right of reply (and unregistered users cannot receive private messages).
 
<!--EZCODE QUOTE START--><blockquote>Quote:<hr>
There seems to be still some sort of myth out there that self-employed people and company directors pay less tax than PAYE workers. In fact, it's not the case, and you could more credibly argue the opposite, as PAYE people can claim the same tax bands and credits as the self-employed but the self-employed can't claim the PAYE allowance.
<hr></blockquote><!--EZCODE QUOTE END-->

Ah come on, Tommy, you just can't be serious!!!!! As a practising accountant you must KNOW this is not true.

I base my position on three main headings

1) The self employed have <!--EZCODE ITALIC START--> legitimate<!--EZCODE ITALIC END--> opportunities for tax avoidance

2) The self employed have considerable scope to "bend" the rules around the edges.

3) The self employed have the opportunity to engage in outright tax evasion.


In more detail...........

<!--EZCODE BOLD START--> 1. Legitimate tax avoidance.<!--EZCODE BOLD END-->
The facility to shift income from one tax year to another hugely assists tax planning and tax avoidance. This facility is not available to the PAYE taxpayer. This can also help in other areas eg Social Welfare and Higher Education Grants. I well remember going to college and getting no grant and paying full fees as our family income was over the threshold. Meanwhile, the sons of particularly well off shopkeepers and big farmers not alone got their fees paid but qualified for grants as well! How? Simply by realising that the Higher Education means test was done for the first year in college only and the grants for future years were based on this alone. Incur capital allowances, defer income, bring forward costs and, hey presto, income for the year of assessment disappears! Result; sprog gets fees and grant paid for up to six years in college; possible benefit up to £30,000.
The self employed benefit from being able to use the "wholly and exclusively" test for tax deductible expenses rather than the "wholly, exclusively and necessarily" test applied to the PAYE sector. And, there is no doubt that the "necessarily" test is applied VERY strictly! This concession alone I would willingly swop for the piddling little PAYE tax credit.
And then there is the ability to employ family members and avail of their tax credits and bands. The most glaring opportunity for this arises under the individualisation provisions, whereby a spouse who becomes am employee can avail of the £28,000 lower tax band.
Not to mention more favourable treatment when it comes to pension provision/ARF/PRSA. Of course, mere PAYE taxpayers could hardly be expected to manage their own money in retirement! :mad
And finally, ther are our ridiculous tax residency rules which have been relaxed (by McCreevy) to the extent that businessmen who run prominent <!--EZCODE ITALIC START--> Irish<!--EZCODE ITALIC END--> companies and are prominent in Irish public life are legitimately(!) non tax resident here. Payback time or what??

<!--EZCODE BOLD START--> 2 "Bending the rules"<!--EZCODE BOLD END-->

Clearly there is scope for turning legitimate tax avoidance into something more grey. Almost every item in part 1 above can be bent at the edges in a manner that is almost impossible to detect. How certain are we that all family members who are employed in the business actually put in the hours. Who checks? How robust are the checks? Or is it all a matter of self assessment ie write your own tax bill.
Or what about the builder engaged to renovate a shop/office/farm building. The invoice for 50k or 100k looks reasonable and will feature in the business accounts.............even though half the work was done on the taxpayers residence. (Remember Lowry?) And don't tell me it doesn't happen or the revenue will find out.
Or the business trip to wherever (to meet clients, attend a trade exhibition/conference) that's really a holiday! And if the partner/children/mistress is an employee, they can come too.
Or the computers, laptops, printers that are purchased for the business but end up in regular family use. Why stop there. From stationary to TVs, videos, microwaves, the list of possible dual purpose items is endless. Again, who checks, how robustly etc.
And what about the concept of "self-supply" whereby a shopkeeper supplies the family with groceries etc. In the UK tax code an explicit provision is made for this, both in income tax and VAT. Here, I presume tax advisors advise clients to fully declare such things. Whoops, there goes a pig past my window.


<!--EZCODE BOLD START--> 3. Tax evasion<!--EZCODE BOLD END-->
We know it was rampant in this country. Even though we were told for years that there was no uncollected tax, that evasion was a "myth" (Useful word, that), we now know, thanks to successive enquiries, that tax evasion was rife, that it was facilitated by banks, solicitors, and, yes Tommy, by accountants and tax advisors too. Furthermore it was known about and condoned (and even practised) by the highest in the land.
Of course, it still goes on. From the ten or twenty note regularly taken from the till, to the jobs done for "cash" right up to sophisticated forging of documentation, tax evasion hasn't gone away you know. Look at the list of tax evaders published last week. The usual suspects are still at it. Lots of publicans, shopkeepers, traders, builders, hauliers, farmers, landlords. Funny enough, I didn't see many PAYE type occupations in the list. No guards, teachers, labourers, clerks or secretaries. Funny that.

Finally we have the evidence of revenue audits. The AVERAGE revenue audit turns up between 5k and 10k unpaid taxes. How much more must be out there? Clearly, the ability of the revenue to police the blatant tax evasion is stretched to the limit. The resources to police the "bending at the edges" type stuff in part 2 above must be minimal to non-existent.

Apologies for rant, but the blatant injustice of it all just gets me going. And then the self-employed have to the cheek to claim that they are the hard done by ones!

There's no justice in the world..............
 
Observer,

Why are you not self-employed?

btw. Thanks for the 'tips' .
 
I often wondered about the unequal treatment of PAYE earners and self-employed people regarding the PAYE allowance. I pay income tax by direct debit on the 9th of each month, for income I have not received yet and won't receive for the following 4 - 6 weeks (on average). How does the government justify this unequal treatment? Having read "Observers" reply, I wonder, are these the main reasons for not giving self-employed people the PAYE tax credit: "Legitimate tax avoidance", "Bending the rules" and "Tax evasion". Does anyone see any other reasons?
 
Hello Selfemployed

The same logic probably applies to paying 135% of your 2001 liability in preliminary tax in October 2002.
 
Cathal,

I can choose to be employed or self-employed as I see fit. All I ask is that the decision should be based on no favourable tax treatment for either option.

In other words, if I choose to be self employed, it should be because of the ability to earn more, to be properly rewarded for my efforts, to be my own boss, to fulfil my ambitions or whatever. It should <!--EZCODE BOLD START--> not<!--EZCODE BOLD END--> be on the basis that the taxman will treat me more favourably.

Hardly unreasonable, I think.

Observer
 
Hi Observer,

Ive no intention of rebutting your various points one by one except to say that your understanding of the Irish tax system seems to be rooted in the assumption that it has been stuck in a timewarp since around 1985. With respect, I can only remark that its a pity that you couldn't have informed yourself better before letting your "holier than thou" prejudices and ideology cloud your judgement. You seem to be blaming the self employed for all the ills of the world, even the fact that the Govt have (scandalously, IMHO) not extended ARF's to PAYE pension holders!

For example, and without even getting started, I'd really love to hear you explain exactly how the alleged "facility to shift income from one tax year to another" works in practice nowadays...

Furthermore, it is a fact of life that <!--EZCODE BOLD START--> all<!--EZCODE BOLD END--> classes of taxpayers can avail of legitimate tax avoidance opportunties (ever bought a S.23 property, subscribed to a pension or invested in BES?) and also that all classes of taxpayers (even people on PAYE) have been known to illegally evade tax.

You obviously don't know that the self-assessment system works on the basis that taxpayers' affairs are subject to forensic examination in Revenue Audits. Audit cases are selected (i) at random, (ii) from specific cases where unusual trends, anomalies or transactions are spotted and (iii) from certain industry sectors where previous instances of illegal evasion have been found. There are drastic penalties (correctly) levied on those who have flouted the system.

This means that if a taxpayer is foolish enough to attempt, on any sort of meaningful scale, any or all of the scams you mention, they are quite likely to pay the penalty in the long run. If you've followed the various AAM discussions on tax-avoidance ideas in the past, you will have seen myself and other specialists in this area repeatedly outlining how the system is designed to thwart all such "creative" ideas such as misuse of individualisation bands, etc. If you don't believe this, why not take a peek through our archives, or better still contact the Revenue yourself, and they will be delighted to explain the system to you.

Tommy
www.mcgibney.com
 
Ansbacher day

Observer thank you for your brilliant post.

I'm looking forward to Tuesday, I don't expect to see too many paye workers listed.

I am the paye working child from a business/farming family. I understand exactly where you are coming from. All the children got grants to go to University. i laughed when my parents whinged about the level of taxes they paid it was small fry relative to the amount i paid as a paye worker. they have since retired. The accountant was given a bonus each year if he managed to find a tax loophole. the more loopholes he found the bigger the bonus. He always managed to find a loophole. My parents were happy to pay their taxes as long as they weren't paying too much.

yes, tommy your right, the tax audits will find out the non paying taxpayers - but Observer has correctly identified that you won't find the paye worker listed.

Roll on Tuesday.
 
Re: Self Employed

Hi Tommy - I don't believe that there is an equitable tax situation between self-employed and PAYE. In particular, the practice of tradesmen working for home-owners doing the job 'for cash' is widespread. From my discussions with a number of individuals, they estimated that approx one-third of their gross income was in cash, and was therefore untaxed.

Regards - RainyDay
 
Re: Self Employed

Hi RainyDay,

Remember that for every self-employed individual who accepts "cash" payments and thus evades tax, there are a far higher number of customers (both PAYE and self-employed) who agree to collude in this tax evasion. If a customer agrees to pay cash in return for a lower price, effectively the tax evasion is being committed by both the service provider and the customer. And unless we're talking about services targeting the self-employed, as PAYE employees outnumber self-employed in this country, I'm sure it's safe to assume that there are more PAYE customers than self-employed customers colluding with this type of tax evasion.
 
Re: Hypocracy

I fully agree with you - And I'm amazed at the blank faces or looks of disbelief I get when I point this out to someone who tells me they just 'got a great deal for cash'.

BTW, my first introduction to 'deal for cash' was from a solicitor I engaged in a dispute about ten years ago. When I balked at his exorbitant fee, he told me he could cut the fee by about 40% 'for cash' - so it's not just the builders!
 
Tax and the self-employed

The honour of it all, moved to the great debates........!

Still, clearly some issues to be dealt with.

Tommy said:
<!--EZCODE QUOTE START--><blockquote>Quote:<hr>
Hi Observer,

Ive no intention of rebutting your various points one by one except to say that your understanding of the Irish tax system seems to be rooted in the assumption that it has been stuck in a timewarp since around 1985. With respect, I can only remark that its a pity that you couldn't have informed yourself better before letting your "holier than thou" prejudices and ideology cloud your judgement. You seem to be blaming the self employed for all the ills of the world, even the fact that the Govt have (scandalously, IMHO) not extended ARF's to PAYE pension holders!
<hr></blockquote><!--EZCODE QUOTE END-->

Tommy,

I'm not holier than thou. Believe me, I am happy to sin when I get the chance. However, as I PAYE taxpayer, I DON'T GET THE CHANCE TO SIN!! My tax is deducted before I see it and the revenue knows every penny I earn.

I most certainly do not <!--EZCODE ITALIC START--> blame<!--EZCODE ITALIC END--> the self employed. I blame the government for allowing a tax regime to exist whereby the self-employed fare far better than PAYE folk. I particularly blame McCreevy for hte most blatant examples of this. (Residency, ARFs, individualisation) I think he has a particularly pro-self employed approach.

On a close reading of your post, I think we actually agree on quite a few things, namely:
- circa 1985 tax evasion was rife and mainly practised by the self employed (Ansbacher for the big guys, bogus offshore accounts for the middle classes) (BTW I was paying 65% tax and more in PRSI in the mid eighties on an income of about £14k while all this was going on - I was also repaying a student loan - so no apologies for feeling strongly about this - I was robbed by the self employed tax evaders)

- the situation has changed somewhat with the introduction of self assessment and revenue audits

- I also agree and acknowledge that your advice to would be evaders here on AAM has been of the highest propriety and, indeed, somewhat on the conservative side, I would say, in terms of what will pass revenue muster.

I do not accept that tax evasion and particularly "bending the rules" is now a thing of the past. The audits tell the tale. In 2001, 16,403 audits were carried out yielding €354.49 million. That's an average of <!--EZCODE ITALIC START--> over 20k of evaded tax per audit<!--EZCODE ITALIC END--> And a princely total of 4 jail sentences were handed down for the THEFT of this huge sum! This is not stringent, it is a welcome attempt to tackle the problem, but its only a start.
Of the audit cases, a grand total of 740 were random audits! Its a joke! The average self-employed who doesnt "come to notice" faces a minute chance of being audited. I make that a 1 in 300 chance (based on just over 200,000 self-employed?)

To make any realistic impression at least ten times this level of random audits is necessary. It should be a requirement for all financial institutions to obtain an RSI number for each accountholder and forward the details to the revenue. Revenue should in turn have free access to all financial details. Provision of RSI numbers should be mandatory for purchases of property or cars and all businesses should be required to issue receipts with RSI number for each transaction. Drastic, yes. Necessary, just look at the evidence from audits, ansbacher, bogus non-resident a/cs, clerical medical etc)
And most importantly, does it work elsewhere. YES, look at the US for a revenue service with real teeth, Sweden, for disclosure of banking details.
 
Re: Ansbacher day

Observer I think you've an outdated view of the
self assessment tax system. Up to five or ten
years ago the abuses you list were possibly
widespread. This is certainly not the case
currently. I am a sole trader/self assessed.
The tax man is very strict about what can be
claimed as a business expense - I don't even get
travel because most of my work is with one
particular company. My expenses last year (and
yes I do use that computer for work purposes)
came to less than 6% of my revenue - I pay full
whack income tax on the balance including PRSI
and without the PAYE allowance.

If you still feel aggrieved, I'd point out that
there are plenty of ways to commit fraud besides
abusing the tax system: dodgy insurance claims,
stealing from social welfare, abusing sick pay,
etc. If you feel the PAYE system isn't offering
you enough opportunities, then try some of the
other areas.
 
Re: Hypocracy

Hi Rainyday

We've talked before about the black economy and unfortunately, from anecdotal evidence alone, it never seems to go away. Obviously, both product/service providers and their customers are complicit in these scams, as Liam pointed out.

However, I do think it is grossly unfair to the large majority of honest and compliant self-employed taxpayers to allege (as Observer did) that they are all cowboys, or indeed to assume that every self-employed person is somehow paying less than their fair share relative to employees, company directors and others in the PAYE sector.

Tommy
 
You must log in or register to reply here.
Back
Top