Taxation update and summary

2. Taxation update and summary • Prepared for Irish Association for Counselling and Psychotherapy • Summary basics on tax and other considerations • Types of entities – tax and pros/cons • VAT matters • Other useful tax matters • Any questions

3. Taxation update and summary • The very beginning ! • What entity to use ? • Sole trader – non incorporated entity – you are the “business” • Partnership – two or more professionals acting together in business • Company – Separate legal entity from which you as the owner takes a salary • Tax – levied on income less expenses in all cases

4. Taxation update and summary • The basics • All income earned in a year is subject to tax in that year • Expenses “wholly and exclusively incurred” in generating that income are tax deductible • Section 81 Tax Consolidation Act 1997 • Can not claim deduction for personal expenses • Can not claim deduction for capital costs BUT • If functional to business then capital allowances claim possible

5. Taxation update and summary • Typical expenses • Generally nearly all running costs of an office if separate to your home • Rent/rates/insurance/utilities/cost of support staff/Accountants etc • Also can claim for necessary travel TO/FROM that office to clients but NOT to/from home • Costs of research/cpd courses/conferences claimable also • Capital allowances (12.5% pa) on items such as laptops/office furniture etc

6. Taxation update and summary • “Home” office – not untypical with many start up or part time business in particular • You can claim for the extra costs as a business expense • Portion of home utilities/ extra ISDN line etc • Bit more care required • Same general principles in relation to whatever business structure is used

7. Taxation update and summary • Records to be kept • Totally dependent on volume of business • Can be anything from excel spreadsheet through to Sage Line 50 (probably more suitable for companies) / Xero Accounting or Tas Books • All more or less the same • KEY point from tax perspective • Keep all records for 6 years

8. Taxation update and summary • Types of business • Sole trader • The easiest and most straight forward • Recommend generally keep separate bank account for business income and expenses • Pay tax out of that account too • Transfer “drawings” to own personal account each week or month as appropriate • REMEMBER – tax is levied on Income LESS expenses not necessarily on drawings

9. Taxation update and summary • Sole trade Accounts for tax • Simple one page Income less expenses = Profits • Tax on the Profit • Tax rates 20% up to €33,800 per annum and 40% on balance • PRSI at 4% and USC at various rates up to 7% generally on all income • SO Effective rate circa 31% on profits up to €33,800 and 51% thereafter • If over €70k then 8% USC and if over €100k then 11% USC

10. Taxation update and summary • Basis of assessment • Year 1 commencement – assessed on profits from commencement to following 31 December • Year 2 – If only one year end then assessed on profits on 12 months to that date OR • Year 2 – If two year ends in that year OR accounts for less than 12 months then taxed on profits for 12 months to later of those dates • Year 3 onwards – Assessed to 12 months ending on Accounting date

11. Taxation update and summary • Basis of assessment continued • Cessation: • Last year – from 1/1 to date trading ceased • 2nd last year then assessed on normal year end basis BUT Revenue will assess on actual (jan to Dec ) basis if higher profits • Short lived business – less than 3 years –assessed profits can not exceed actual profits • Plan tax payments in good time based on estimated profits

12. Taxation update and summary • Example - Mr A has Income estimated in 2015 of €50k and expenses are €15k Profits therefore will be 35K. Mr A is single € € Gross 35,000 Tax €33,800 * 20% 6,760 Balance €1,200 * 40% 480 Less pers credit (1,650) Tax 5,590 PRSI/USC 11% 3,850 Total 9,440 (9,440) = 27%

13. Taxation update and summary • In summary Mr A should save 27% of all receipts received each month to pay tax • When does he pay tax ? • For Year end 31/12/14 the key date is 31/10/15 as will be extended if filing online via ROS probably to circa 12th November • On that day: • File 2014 Tax Return and pay balance of tax • Pay preliminary tax for 2015

14. Taxation update and summary • Preliminary tax 2015 • Must be at least equal to the lower of: • 90% actual liability in 2015 OR • 100% of liability in 2014 • In summary this is very significant date for all self employed persons and must be planned and anticipated in advance • If late filing then surcharge of up to 10% of full liability can arise • If tax underpaid interest charges of circa 9% per annum can arise

15. Taxation update and summary • How can tax be mitigated • Maximise expenses • Employ spouse/child – great care required and must be bona fide appointment • Pension planning – can claim tax relief of between 15% and 40% of profits when paid as a pension premium depending on age • Deemed income ceiling of €115k per annum • Can pay in 2015 and claim back to 2014 thus producing real saving of up to 41% if on marginal rate AND cash saving on 2015 prelim tax of 40%

16. Taxation update and summary • In general sole trades are • Easy to set up and wind down • Little oversight and regulation • Losses can be offset against other income though be careful of new rules requiring 20 hours per week on average to make it a genuine trade • Disadvantages • No limitation on liability if sued by third parties • Tax on profit rather than drawings • Difficult to have a business “asset” to sell on in future

17. Taxation update and summary • Partnerships • For tax purposes really just two sole traders coming together • NO tax on the partnership as such but an additional Form 1 Firms must be lodged each year • Joint and several liability as between partners for issues in the business • No limited liability and again little bueraucracy • MUST have a partnership agreement setting out how profits shared, future dissolution etc

18. Taxation update and summary • Limited liability companies • A big step for any sole trader or partnership to take • Creates business asset separate to that of the owners who have a “share” as a % of ownership of that company . • Owners reward is salary/dividends from that company – taxed at source on salary taken BUT • Profits retained in the company are not subject to PAYE etc • Therefore greater flexibility for High earners

19. Taxation update and summary • A company has limited liability BUT more onerous requirements in terms of: • Statutory Accounts and filing deadlines • CRO – Abridged Accounts – balance sheet and notes must be filed to maintain the normal audit exemption generally applying to small companies • More expense from Accountants • More difficult to wind up • Can be tricky if two separate owners want go separate ways • Losses are company losses and can not be offset against personal income

20. Taxation update and summary • Tax in companies • Same principles as to expense deductibility – wholly and exclusively rule • Salary taxed at source is a deductible expense • Expenses such as travel and subsistence PERSONALLY incurred can be reclaimed tax free from company • WATCH OUT FOR REAL FIXED PLACE OF WORK when making claims !!! • Company pays tax at 12.5% on profits

21. Taxation update and summary • Greater pension planning in companies – premiums allowed on paid basis • Accounts filed via ROS on CT 1 9 months after year end • Start up exemption may apply if significant Employer PRSI costs but difficult in practice to claim • In general a sole trade or partnership business is best suited to most small practitioners unless there are over riding concerns as to limited liability matters

22. Taxation update and summary • Practical matters • ROS – Revenue online system • Very useful for registering for tax and paying tax • Use existing PPS number and online TR1 to register as a sole trader • All partners must be registered for Income tax before partnership is registered • Register Business name on CRO website – very user friendly

23. Taxation update and summary • Trading through a company • Dedicated co sec Firms linked to most Accountants • Can register company within 6 or 7 working days • Must not be too alike an existing company name • Company have business trade name also • Register new company with online TR2 via ROS

24. Taxation update and summary • Taking on an employee • Taxed at source by you or as appropriate your company • Obligation to register as an Employer • Build in the Employer 8.5% or 10.75% rate of PRSI into costings • Must generally give the employee access to a PRSA provider BUT no obligation to provide a pension • PAYE/PRSI/USC deducted must be returned each month or quarter by you as employer to Revenue

25. Taxation update and summary • Employee v self employed contractor • Employee is under your direction and control and not in business on own account • Typically in the general medical area all “locums” will be regarded as employees • If work subcontracted to a self employed colleague “in business on own account” then once a valid invoice received and verified and very much isolated then possible to pay Gross • Case by case basis – err on side of caution !

26. Taxation update and summary • VAT matters ! • Depends on • (i) Nature of services • (ii) Turnover • Registration required by any business entity in business making supplies of vatable services for consideration in excess of €37,500 per annum • Election to register if below that limit

27. Taxation update and summary • Consequences of registration • When issuing fee must indicate fee AND the extra VAT. • You collect the full VAT inclusive fee and pay VAT portion to Revenue on ROS VAT Return every two months • Can claim back VAT on costs • Great care required because VAT is on the Turnover of the business • VAT on medical services leaflet on revenue.ie • Strict medical exempt but psychotherapy in App B – 13.5%

28. Taxation update and summary • If turnover less than €2 million then cash receipts basis applies • VAT is the main reason for tax audits • Maintain adequate records such as appointment books, point of sale terminals cash register Z totals etc BUT on a proportionate basis • Maintain original invoices of everything that you are claiming back VAT on and make sure invoice issued to you/your business

29. Taxation update and summary • Other tax matters • If you incorporate then under Section 600 TCA 1997 you can transfer value in your business to a limited company tax free once the only consideration is shares in that new company and NOT cash • Retirement Relief – Section 598 TCA 1997 – if over 55 and had a business or shares in a business for 10 years then once consideration on sale is less than €750 k it may be tax exempt • Other reliefs apply when passing business to next generation including gift tax relief of up to 90%

30. Taxation update and summary • Tax audits • Driven by likely perceived risk of tax loss by Revenue • Cash business is regarded as key risk area • Must have enough drawings or salary to show you earn enough to live on – of course if part time in business and have other income then this can be taken into account also • Self assessment rules apply BUT always be prepared for the day you may be looked at by Revenue !!

31. Taxation update and summary • Useful miscellaneous points • A “chargeable person” is a person who is chargeable to tax on income – see Revenue Tax and Duty manuals chapter 41 A • So, starts with every taxpayer and then grants exclusions: • An individual who is in receipt of PAYE source income only • An individual with some non PAYE income (max €3,174) and coded in to be taxed at source • Ignore deductions that may apply when arriving at the €3,174 • Directors must do a Tax Return also with some exceptions

32. Taxation update and summary • Other miscellaneous points • Full self assessment • Applies from 2013 onwards • Taxpayer (or their agent) must complete a self assessment section on Tax Return to calculate Tax • Revenue calculation giving indicative calculation and you can then agree or amend • Fail safe on ROS as will not let you file without completing this section • Penalty of €250 if you fail to complete

33. Taxation update and summary • Miscellaneous • Any claim to maximise use of married tax credits etc must be backed up with substance, contracts of employment, “cash” trail etc • Watch for changes in tax legislation in 2014 compared to prior years • 1. Int on loan to invest in a partnership – Section 253 TCA 1997 - No tax relief on interest on new loans after 15/10/13 • 75% of existing interest allowed in 2014- Interest on loans to invest in companies already phased out

34. Taxation update and summary • 2. One parent family credit • From 2014 onwards generally only one parent can claim • Primary carer – guided by Social welfare payments • Highlight issue now especially to non PAYE client base • 3. Incentives – back to work scheme • Long term (> 12 months) unemployed starting new business • Max tax exemption on profits up to 40k per annum

35. Taxation update and summary • Conclusion • Keep it simple but keep records up to date • Work pro actively with Accountant on ongoing basis to make sure no unpleasant surprises in November • Be aware of tax saving opportunities at a micro and macro level • Plan now for the future

36. Thank you • Any questions ? • Alan Lawlor FCCA AITI • Alan.lawlor@wallaceodonoghue.ie • Contact on 01 8880830 or 087/9096392