Query re calculation of tax liability following audit

[Shakespeare]

If a self employed (LTD Company) individual has claimed some expenses over a few years that following a tax audit, are deemed not allowable (thanks to the accountant who said there was nothing to be concerned about!!!!!!) How is the liability before penalties calculated?

For example if eur10k expenses was paid out tax free but actually the expenses weren't allowable, why can the liability not be the value of the tax that should have been paid on it (plus any penalty if applicable).
The revenue are saying the liability is eur11k tax due plus 20% penalty. Ie they are dividing by .48 and multiplying by.52 this would give the figure that the company would have to have earnings of 21kgross to pay out 10k net but there are no retained earnings year on year so if the expenses hadn't been claimed but instead were paid out as salary then the 10k would have attracted tax at 52% why can this now be paid in settlement rather than 11k - totally in good faith (I know no defence) we are facing a tax bill not of eur15k (3 years tax on expenses of 10k being declared disallowed) but of eur42k !!!!and I'm climbing the walls?
Any insights appreciated ?

 

[cremeegg]

The grossing up treatment outlined by Revenue here, is correct. However in my experience they are often willing to accept tax on the net amount.

Is there some other reason why Revenue are adopting a "throw the book at you" approach in this case. Are the Revenue just talking at this stage or have they issued a formal assessment. Generally they like these to be agreed with the taxpayer so you may have some wriggle room to reach an agreement. They may be just threatening you with a "look what we can do" picture now to soften you up so that you will agree quietly to a lesser figure.

You say that the accountant said there was nothing to be concerned about, was this specifically in relation to these expenses?

You can go either of two ways now.

You can challenge Revenue's decision, there must be some argument to support the tax deductibility of the expenses or you wouldn't have deducted them in the first place. By challenge I mean threaten to challenge, Revenue may back down, the do not like formal appeals against their decisions. Though if you do make a formal appeal against their written assessment they will fight tooth and nail.

Or you can plead poverty. Say that you can't pay ask for leniency, talk about your sick mother etc. I know an accountant who brought a client into Revenue in a, completely unnecessary, wheelchair to appeal to their sympathy and it seemed to have worked.

 

[DB74]

Liquidate the company

 

[torblednam]

Liquidate the company

Not a solution to a PREM issue relating to a proprietary director.

The director received emoluments and can be assessed on them if the company can't or won't address it.

This is an even worse outcome because it means the individual has to fund the audit liability out of their after-tax earnings, whereas the company, if still trading, pays it out of its resources which are subject to a much lower rate of tax.

 

[Shakespeare]

The grossing up treatment outlined by Revenue here, is correct. However in my experience they are often willing to accept tax on the net amount.

Is there some other reason why Revenue are adopting a "throw the book at you" approach in this case. Are the Revenue just talking at this stage or have they issued a formal assessment. Generally they like these to be agreed with the taxpayer so you may have some wriggle room to reach an agreement. They may be just threatening you with a "look what we can do" picture now to soften you up so that you will agree quietly to a lesser figure.

I really have no idea why they are taking such a hard line approach straight off the bat. While obviously errors were made, it was very simplistic stuff, done in good faith, hardly a major criminal money laundering exercise but from what I understand they made a declaration to avoid even harsher penalties which was the advice of the accountant or the bill would be even higher.
2 people from Revenue came out to the house for 2 hours but I wasn't there (husband's business not mine directly) so I'm not sure exactly what was said so I don't know if it's too late for leniency etc


"However in my experience they are often willing to accept tax on the net amount" - any idea how to go about asking for this, totally willing to pay up what was done incorrectly but I'm reeling from the bill, this is beyond the worst case scenario we had tried to envisage
Thanks again
S

 

[Gordon Gekko]

As with many businesses, a taxpayer can be unlucky with regard to who he/she has to engage with.

There are some very good people in Revenue, but there are also zealots who don't believe that someone should earn multiples of what they do.

 

[catnonie]

Sorry to cut across this post but I was wondering can these liabilities be accrued for (without interest and penalties) in the company's books and records in the P&L?

 

[dublin67]

Not too sure if this is too late. The Finance Bill 2017 includes a provision that allows the Revenue to gross up and look for tax that way. This means to me that they did not have the power to gross up before that. Most of the settlements I've been involved such payments were taxed as if they were gross and not grossed up. Eg. payment of €10K and the PAYE was €5.2K and employers PRSI (if relevant).

 

[torblednam]

Not too sure if this is too late. The Finance Bill 2017 includes a provision that allows the Revenue to gross up and look for tax that way. This means to me that they did not have the power to gross up before that. Most of the settlements I've been involved such payments were taxed as if they were gross and not grossed up. Eg. payment of €10K and the PAYE was €5.2K and employers PRSI (if relevant).

While technically that's correct on the part of the employer, if followed to its conclusion it results in the employee being separately liable under Schedule E to income tax on the gross amount, with no deduction for the tax paid by the employer (since that tax wasn't deducted from the emoluments paid).

So if you say €10k of expenses, and the company needs to operate ~50% tax on it, that's €5k that the company should have deducted in taxes, and is obliged to remit.

The individual has received a taxable emolument of that €10k, is liable to income tax on it under schedule E, and has no right to any credit by reference to the €5k paid by the company as this isn't tax that the individual has borne.

So that ends up having a similar effect to a grossing up. Except that the employee has to bear half of the cost, out of their taxed income rather than the company bearing it out of its gross income.

 

[Bronte]

If a self employed (LTD Company) individual has claimed some expenses over a few years that following a tax audit, are deemed not allowable (thanks to the accountant who said there was nothing to be concerned about!!!!!!) How is the liability before penalties calculated?

Just on this, my accountant this year told me that revenue have become really strict and things that passed before are no longer allowed. He also mentioned I think that they are being sent way too many tax briefings.