Potential Traps for the Small Business Professional
As the economic uncertainty continues, those lucky enough to still be in business might think that it is enough to concentrate their efforts more on keeping their business afloat than on keeping their tax affairs in order. This is not true and in fact the opposite is the case. Revenue officials are now under more pressure than ever before to collect the tax that is owed, whether it be tax returned but unpaid (e.g. PAYE/VAT returns made without a tax payment) or tax incorrectly calculated.
Where tax/PRSI is understated and the liability eventually comes to light, not only will the tax/PRSI have to be paid but will have to be accompanied by interest and a penalty (the penalty is a rate of up to 100% of the underpaid tax/PRSI).
For those working in roles which involve tax compliance, they face the challenge of getting through their increased workload while trying to keep up to date with changing tax law and practice. Human nature being what it is, the latter is more likely to suffer. Individuals who lost their jobs and were forced to set up their own business (because they could not find alternative employment) are likely to be more at risk for tax non-compliance. Starting out with very limited financial resources, they might not be in a position to engage tax or other professionals at the outset for advice on their legal and tax obligations. On the basis that they expect not be making a profit in the early years, they can mistakenly fall into the trap of thinking that registering and accounting for tax is not a priority in those early years. However, a liability for say, VAT/PAYE is not profit related and in some circumstances registration for one or both taxes may be required at commencement of the trade/profession.
The Most Common Pitfalls
Payroll
Reputable payroll software will most likely calculate PAYE/PRSI/USC correctly but other payroll issues which such software will not address are:
1. Benefit in Kind (BIK) calculations,
2. Employee expense reimbursement,
3. Area of employee - v - self employed,
4. Incorrect PRSI class.
Calculating the value of a BIK for inclusion in payroll can be a difficult task. Take for example, the case where an employee has the use of a company car with high business mileage. At the start of the year, the BIK calculation will take account of the estimated business mileage (usually based on previous year’s figures) to establish the appropriate rate for assessment. It may happen that an employee due to ill health for a large part of the year or a change in customer base may end up clocking up substantially less business mileage for the year than originally estimated. If so, the BIK calculation used throughout the year will be understated with resultant under deduction of PAYE/PRSI/USC.
This can be avoided if all staff (using company cars with business travel exceeding 24,000 kilometres) are asked to submit confirmation of their cumulative business mileage for the year prior to finalisation of the December payroll. Where an employer is reimbursing staff for business expenses and is using civil service flat rates, they must ensure compliance with the conditions set out in the Revenue leaflets IT51 (for motor expenses)and IT54 (for subsistence expenses).
The area of Employee versus Self-Employed has been a hot topic with both Revenue and Social Welfare for many years and there have been many court cases on the issue. As a result of the current economic downturn, some businesses are taking on contractors instead of hiring staff to cut down on cost (e.g. savings on employer PRSI/pension contributions/holiday pay etc.). This may be false economy if such individuals are ultimately adjudged to be employees with resultant arrears of payroll taxes/PRSI/levies etc. together with interest and penalties being charged to the employer.
The Code of Practice for Determining Employment or Self-Employment Status of Individuals (prepared by the Employment Status Group set up under the Programme for Prosperity and Fairness) gives guidance on the issue. Incorrect PRSI classification by employers is another common occurrence, especially in the case of directors. If Class S is used instead of Class A, any under deduction of PRSI will be subject to the same rigours of the law as stated above. On the other hand, if Class A is used instead of Class S for say 10 years and an overpayment arises, Section 8 Social Welfare & Pensions (No 2) Act 2009 imposes a four year limit on repayments - the employer can therefore only obtain a refund for the previous four years and not for the ten years in question. In cases of doubt, a determination of the correct PRSI class should be sought from the Scope Section of the Department of Social Protection.
VAT
· Food/drink/accommodation (from 1 July 2007 VAT on conference related accommodation is deductible)
· Entertainment expenses,
· Acquisition of cars (except as stock in trade or for use as car hire/driving school),
· Acquisition of petrol (except as stock in trade).
Tax Clearance Certificates
For some businesses, having an up to date tax clearance certificate can be critical to their business. Any slippage in tax compliance (e.g. due to time constraints/cash flow problems) will hinder their prospects of renewing their tax clearance certificate. Where businesses are falling into arrears with tax payments due to cash flow problems, they should contact Revenue at the earliest possible opportunity to agree an instalment arrangement (if appropriate).Failing to do so and ignoring resultant tax demands will lead to the case being referred to the Sheriff for enforcement. This should be avoided as it adds to costs and causes further distress to all concerned.
Conclusion
The Irish tax system is complex and is constantly changing. It is very onerous for those in business to run their business and keep up to date on all relevant tax matters.
Businesses should consult with their professional advisors to ensure that they are tax compliant for the work they do in-house. Those who perceive themselves as tax compliant may be unaware of the unintended errors in their tax calculations/tax returns. As evidenced above getting it wrong (no matter how unintentional it might be) is very costly when you add on the penal interest rates and penalties.
Paying fees to a tax professional for a tax health check might be viewed as low priority. However that fee (depending on the findings) may save multiples of that amount in interest and penalties at a later date.
For more information, don’t hesitate to contact us on 01 5330814.
Where tax/PRSI is understated and the liability eventually comes to light, not only will the tax/PRSI have to be paid but will have to be accompanied by interest and a penalty (the penalty is a rate of up to 100% of the underpaid tax/PRSI).
For those working in roles which involve tax compliance, they face the challenge of getting through their increased workload while trying to keep up to date with changing tax law and practice. Human nature being what it is, the latter is more likely to suffer. Individuals who lost their jobs and were forced to set up their own business (because they could not find alternative employment) are likely to be more at risk for tax non-compliance. Starting out with very limited financial resources, they might not be in a position to engage tax or other professionals at the outset for advice on their legal and tax obligations. On the basis that they expect not be making a profit in the early years, they can mistakenly fall into the trap of thinking that registering and accounting for tax is not a priority in those early years. However, a liability for say, VAT/PAYE is not profit related and in some circumstances registration for one or both taxes may be required at commencement of the trade/profession.
The Most Common Pitfalls
Payroll
Reputable payroll software will most likely calculate PAYE/PRSI/USC correctly but other payroll issues which such software will not address are:
1. Benefit in Kind (BIK) calculations,
2. Employee expense reimbursement,
3. Area of employee - v - self employed,
4. Incorrect PRSI class.
Calculating the value of a BIK for inclusion in payroll can be a difficult task. Take for example, the case where an employee has the use of a company car with high business mileage. At the start of the year, the BIK calculation will take account of the estimated business mileage (usually based on previous year’s figures) to establish the appropriate rate for assessment. It may happen that an employee due to ill health for a large part of the year or a change in customer base may end up clocking up substantially less business mileage for the year than originally estimated. If so, the BIK calculation used throughout the year will be understated with resultant under deduction of PAYE/PRSI/USC.
This can be avoided if all staff (using company cars with business travel exceeding 24,000 kilometres) are asked to submit confirmation of their cumulative business mileage for the year prior to finalisation of the December payroll. Where an employer is reimbursing staff for business expenses and is using civil service flat rates, they must ensure compliance with the conditions set out in the Revenue leaflets IT51 (for motor expenses)and IT54 (for subsistence expenses).
The area of Employee versus Self-Employed has been a hot topic with both Revenue and Social Welfare for many years and there have been many court cases on the issue. As a result of the current economic downturn, some businesses are taking on contractors instead of hiring staff to cut down on cost (e.g. savings on employer PRSI/pension contributions/holiday pay etc.). This may be false economy if such individuals are ultimately adjudged to be employees with resultant arrears of payroll taxes/PRSI/levies etc. together with interest and penalties being charged to the employer.
The Code of Practice for Determining Employment or Self-Employment Status of Individuals (prepared by the Employment Status Group set up under the Programme for Prosperity and Fairness) gives guidance on the issue. Incorrect PRSI classification by employers is another common occurrence, especially in the case of directors. If Class S is used instead of Class A, any under deduction of PRSI will be subject to the same rigours of the law as stated above. On the other hand, if Class A is used instead of Class S for say 10 years and an overpayment arises, Section 8 Social Welfare & Pensions (No 2) Act 2009 imposes a four year limit on repayments - the employer can therefore only obtain a refund for the previous four years and not for the ten years in question. In cases of doubt, a determination of the correct PRSI class should be sought from the Scope Section of the Department of Social Protection.
VAT
· Food/drink/accommodation (from 1 July 2007 VAT on conference related accommodation is deductible)
· Entertainment expenses,
· Acquisition of cars (except as stock in trade or for use as car hire/driving school),
· Acquisition of petrol (except as stock in trade).
Tax Clearance Certificates
For some businesses, having an up to date tax clearance certificate can be critical to their business. Any slippage in tax compliance (e.g. due to time constraints/cash flow problems) will hinder their prospects of renewing their tax clearance certificate. Where businesses are falling into arrears with tax payments due to cash flow problems, they should contact Revenue at the earliest possible opportunity to agree an instalment arrangement (if appropriate).Failing to do so and ignoring resultant tax demands will lead to the case being referred to the Sheriff for enforcement. This should be avoided as it adds to costs and causes further distress to all concerned.
Conclusion
The Irish tax system is complex and is constantly changing. It is very onerous for those in business to run their business and keep up to date on all relevant tax matters.
Businesses should consult with their professional advisors to ensure that they are tax compliant for the work they do in-house. Those who perceive themselves as tax compliant may be unaware of the unintended errors in their tax calculations/tax returns. As evidenced above getting it wrong (no matter how unintentional it might be) is very costly when you add on the penal interest rates and penalties.
Paying fees to a tax professional for a tax health check might be viewed as low priority. However that fee (depending on the findings) may save multiples of that amount in interest and penalties at a later date.
For more information, don’t hesitate to contact us on 01 5330814.
