Category: Self Assessment Tax System

Share Options Tax Treatment – RTSO1 Form

March 5, 2022

How Share Options are Taxed?

What are share options?

Share options are generally granted by Public Companies to employees. There are a variety of employee share option schemes and the tax treatment depends on the terms of same and if the scheme has been approved by the Revenue Commissioners. The RTSO1 form is used to make tax payments on share options.

An employee will normally receive an option to buy a certain number of shares in his/her employer company at a fixed price. If the share price goes up then the employee could make a significant gain when the option is exercised.

For 2011 onwards there has been a major change to the tax treatment of employee share option schemes and how the share options are taxed. The benefits of Share Award Schemes, Unapproved share Option schemes and Revenue Approved plans are now liable for PRSI and the Universal Social Charge (USC).

What is the RTSO1 Form?

The RTSO1 form is to be used for the purpose of making a Relevant Tax payment, on a Share Option and associated Universal Social Charge and PRSI, to the Collector-General.

What Happens If I Make a Gain on Share Options?

How the tax rules operate is best explained by the following example:

  1. Mr. Smart receives a share option whereby he can buy 10,000 shares in his employer company. The share option plan has not been approved by the Revenue Commissioners. The price per share is €1 which is the market value of the shares when he receives the option.
  2. After one year the shares are worth €3 each. Mr. Smart buys the shares at this point.
  3. Six months later the shares are worth €4 each and Mr. Smart sells them all.

What tax does he have to pay on the share options?

A. Sale Proceeds: 10,000 shares @ €4 €40,000
B. Cost Price: 10,000 shares @€1 €10,000
Gain made by Mr. Smart €30,000

For tax purposes this gain is divided into two parts. The first part applies when the share option was exercised. He made a paper profit of €20,000 at this point. This is calculated as follows:

Cost of Shares;10,000 shares @€1 = €10,000
Value of Shares;10,000 shares @€3 = €30,000
Paper Profit: €20,000

 

How to Calculate your RTSO1 Share Option Tax

This paper profit is immediately liable for income tax and must be paid over to the Revenue within 30 days of exercising the option. Assuming the 40% tax rate applies the tax on the share options is €8,000. From 2011 onwards PRSI (4%) and the USC (8%) charges also apply. This gives the total tax bill of €10,400. The Revenue form RTSO1 is used for the purpose of making a Relevant Tax on a Share Option payment.

Click Here to download your RTSO1 Form from Revenue.  This form is used for making payments for the Relevant Tax on a Share Option to Revenue.  The RTSO1 form Must be completed and submitted to Revenue within within 30 days of the  exercised date.  When calculating the Tax liability on your share options  income tax , PRSI and USC at the highest rate should be included.

Where an employee benefits from an Unapproved Share Option Scheme a Self Assessment Tax Return Form 11 for the relevent year MUST be made.

 

Capital Gains Tax (CGT) on Share Options

The  second part of the tax charge arises when the shares are sold. Mr. Smart made an overall gain of €30,000. He has already paid income tax on €20,000 and then pays capital gains tax on the remaining €10,000 gain. Using the current 33% capital gains tax rate and ignoring the annual exemption the tax charge amounts to €3,300.

In summary Mr. Smart made a total gain of €30,000 on which he paid tax of €13,700.

See Also  Capital gains tax calculator

The tax rules for dealing with share options are complex and depend on the type and terms of the scheme involved. There are many different types of share option schemes. Broadly speaking, the different schemes are divided into Unapproved Share Option Schemes (means not approved by the Revenue Commissioners) and Approved Share Option Schemes (means the scheme has Revenue Approval).

For unapproved schemes there are strict deadlines for when the tax is due and for the declaration of details regarding share options to the Revenue. If these dates are missed, interest and penalties can arise. Independent professional advice should be obtained when dealing with share options to ensure all matters are properly dealt with.

Where an employee benefits from an Unapproved Share Option Scheme they are obliged to make tax returns under our Self Assessment Tax System.
Apart from Unapproved Share Option Schemes the other type of schemes generally fall within the following categories;

  • Revenue Approved Share Option Schemes
  • Share Subscription Schemes
  • Approved Profit Sharing Scheme
  • Employee Share Ownership Trusts
  • Save As You Earn Schemes

The rules and regulations for these schemes will normally be explained by your employer.

Running your Business from Home Tax Deductions

March 5, 2022

What home expenses can a sole trader deduct against their income tax liability?

With the benefits of modern technology many sole traders now run their business from home. This raises many questions about the tax rules for claiming a tax allowance for expenses such as light and heat, mortgage interest etc. Leaving aside the question of tax claims for your house against the business all other normal business expenses are of course tax deductible against business profits.

We will now deal with the usual questions that arise in relation to working from home:

How do I claim for Light & Heat Costs when running my business from home?
Separate billing is not required provided a reasonable amount only is claimed as a business expense having regard to the nature of the business.
Can I claim for my home phone against my self-employed income?
Yes. However we recommend that you obtain separate lines for business use and then the full cost of same can be claimed in the usual way.
Can I claim the cost of my Home Office Furniture & Equipment for tax purposes against my additional self employed income?
Yes, subject to the normal rules i.e. the cost is allowed over a period of eight years.
Can I claim my mortgage interest as a tax expense of the seff-employed business?
Yes but only in proportion to the amount of space used. If you do claim an amount of your mortgage interest as a business expense you cannot claim the normal mortgage interest tax relief for that amount of interest. See Question 6 below regarding Capital Gains Tax treatment.
Can I charge a rent for the use of my house against tax on my self-employed income?
If the house is owned in joint names and you carry on business in your sole name then the answer is yes, but it must be a reasonable rent having regard to your circumstances. Remember that the rent received is subject to taxation under rental income rules. Generally speaking a rent is not charged for use of one’s house.
If I run my business from home and I sell the house will I pay capital gains tax on the sale?
You may have to pay capital tax thereon in proportion to the amount of the property used for business purposes. This is an important matter that needs to be kept in mind when running your business from home.
The benefit of either claiming mortgage interest relief as a business tax deduction (as distinct from the normal tax relief for mortgage interest) or of charging a rent for the space used needs to be weighed up against the Capital Gains Tax exemption for selling your house.
If I benefited from the owneroccupiers stamp duty relief when buying the house is there a problem in running my business from home?
Assuming the business use is of a minor nature and you do not charge a rent for the use of same then in practice there should be no difficulty.

Company Directors

March 23, 2020

The rules can be more generous here as regards the amounts paid into a scheme which will qualify for tax relief. A cap is placed on the size of the fund rather than on annual contributions. Where there has not been any great pension funding in the past these rules can allow very substantial tax allowable payments in the years coming towards retirement. This is generally referred to as “Back Service Provision”.

If your business is earning profits in excess of your salary requirements you need to consider how this surplus income will be invested and treated for tax purposes. If you trade as a sole trader/partnership you will pay normal income tax at the 20%/ 40% rates as applicable. However if you trade as a limited company the profits would be taxable at a 12.5% tax rate which could make it worthwhile to carry on business through a company. It should also be possible for your company to invest greater sums into a pension fund for your benefit and obtain tax relief thereon. The other alternative instead of pension funding is for direct investment by the company. At retirement the company would be liquidated and the funds paid out to in the form of a capital gain and liable for tax at 33%. However it might be possible to receive a substantial amount tax free under the capital gains tax retirement relief rules. This type of arrangement requires detailed planning in advance.

Revenue Tax Audits

March 23, 2020

What happens if I get a Revenue Tax Audit?

Our tax system is policed by means of penalties and interest charges where tax returns and payments are not dealt with on time and also by random Revenue Audits. By now a lot of people have been audited by the Revenue and nearly everybody knows somebody who has had a Revenue Audit.

The forms of sanction imposed by the Revenue during the course of their audit consists of all or a mix of the following –

  • Extra tax owed
  • Interest charge for late payment
  • Penalties on top of the extra tax due
  • Publication of your details in the Tax Defaulters List
  • Prosecution

While many individuals receive a clean sheet from the Revenue following an audit, most people end up owing some additional tax together with interest and penalties thereon. Even innocent errors can give rise to additional tax liabilities upon which interest and penalties can arise.

Under self assessment we all have to manage our own tax affairs. For many small businesses this can involve very substantial amounts on money in the form of VAT and PAYE/PRSI deductions for employees. Even small errors in the operation of the VAT and PAYE/PRSI rules can give rise to substantial tax liabilities being owed. You are given the opportunity to make a voluntary disclosure if you receive notification that you have been selected for a Revenue audit.

What to do if you are notified of a Revenue Audit

The receipt of a notification of a Revenue Audit assuming your tax affairs are all in order should not be a matter giving rise to concern. You may have been selected on a purely random basis for verification of your tax returns.

On the other hand if you are aware of issues that may be queried by the Revenue auditor then you should consider obtaining professional advice for dealing with the Revenue auditor.

We would recommend that you engage a tax consultant to review your books and records well in advance of the audit to identify any potential issues. You would agree the figures and approach to take with Revenue with your tax consultant who would also be present to assist during the initial meeting with the Revenue auditors. Generally, your tax consultant will act as a go between for you and Revenue in finalising matters during the weeks following the audit meeting.

Revenue audits are often instigated based on information the Revenue have obtained from other sources. A voluntary declaration of matters that may cause difficulties with the Revenue prior to the commencement of the audit should ensure that the audit is dealt with in a speedy manner and also helps to reduce penalties, which would otherwise be added to whatever additional tax is found to be due.

What are the interest and penalties for unpaid taxes?

If the Revenue auditor discovers additional tax owed then interest and penalties will be added to the actual tax owed.
The Interest charge is calculated on a daily basis from when the additional tax should have been paid. The interest charge works out at approximately 8% per annum.

Penalties of up to 100% of the additional tax can arise. The amount of penalties will depend on type of disclosure made to Revenue, the nature of the problem, the quantum of additional tax due, and the degree of cooperation received by the Revenue auditor.

In practice, the charge for penalties ranges from 3% to 100% of the extra tax owed. To qualify for the lower rates of penalty the amount of additional tax must be relatively small, the Revenue auditor must have been advised of the matter before the audit started and full cooperation must have been provided during the course of the audit.

Will my name appear on the Tax Defaulters List?

Following a Revenue audit if you make a settlement with the Revenue your details will not be published in the Tax Defaulters List if –

  • You made a qualifying disclosure to the Revenue Auditor before the commencement of the audit. No publication of your tax settlement details will be made regardless of the amount of the settlement.
  • Where the penalty agreed does not exceed 15% of the tax included in the settlement.
  • The amount payable to the Revenue is less then €33,000.

 Revenue Audits for the Small Business and what they look for.

The owners of small businesses manage very high amounts of tax and are responsible to the Revenue for the proper operation of same and for the collection and payment of various taxes to the Revenue. Genuine errors can give rise to large tax bills with interest and penalties charged on top of the tax due making it substantially higher. Revenue audits will focus on the operation of VAT and also on how PAYE/PRSI is operated. In addition they will pay particular attention to business expenses claimed by the owners and also for employees.

VAT is an area where the Revenue collect substantial amounts of tax from audits. The use of incorrect rates of VAT and the reclaiming of VAT on costs which are specifically not allowed continues to be fertile ground for Revenue auditors. You are not allowed reclaim VAT on any of the following:

  • VAT incurred on the purchase of cars, car hire or car leasing and on petrol (VAT on diesel is reclaimable).
  • VAT incurred on entertainment which includes VAT on corporate entertainment.
  • VAT on food, drink and accommodation for the trader and his employees or agents which includes the staff Christmas party and also VAT on water.

Where you have employees the Revenue will check the operation of PAYE/PRSI and also how you have dealt with expenses claims for employees and the application of benefit in kind which is also the responsibility of the employer. If you run your business through a limited company you will be treated as an employee of the company even though you own it and subject to the same rules and regulations as any other employee. The issue of PRSI for shareholder directors who do not own more than 50% of the company can be a contentious matter. If for example you own 20% of the company you could be liable for PRSI at the normal employee rate (if you have not received approval from Dept of Social Welfare for the application of the S rate) which also involves employers PRSI. This is known as the A rate. The employers PRSI is 10.75% of your total salary. If as is often the case you are paying PRSI on the S rate which does not involve employers PRSI then a significant amount of PRSI could be owed to the Revenue.

The claiming of business mileage and expenses is another area which gets a lot of attention from the Revenue Auditor.  If full details of business mileage and expenses are not properly maintained, then problems can arise. The Revenue Auditor will always focus on such claims made by owners of the business and also examine what income the owners are receiving from the business. They carry out a lifestyle check to ensure that the assets and liabilities of the owners can be substantiated based on the income they receive from the business.

For those involved in the construction industry the operation of the subcontractors tax is another area that receives a lot of attention from the Revenue auditor.

What is VAT (Value Added Tax) ?

March 23, 2020

VAT is a transaction based tax that we all suffer on an ongoing basis. There are special rules applicable to business and property matters. We do not intend to provide a detailed guide to the operation of VAT. It is an extremely complex tax particularly in relation to property transactions.
Any person running a business either as a sole trader, partnership or through a limited company must register for VAT purposes with the Revenue Commissioners if the turnover of the business exceeds certain levels and the products they deal in are liable for VAT.
Certain business activities are exempt from VAT, e.g. medical practice, insurance brokers, and such business are not required to register for VAT regardless of their turnover levels.
There are two levels of turnover which must be exceeded before you are obliged to register for VAT.

Where services only are provided e.g. freelance consultants and annual turnover is likely to exceed €37,500 then you must register for VAT and charge VAT on your sales.
A higher threshold of €75,000 applies where the business is selling goods as distinct from services.

V.A.T. Rates
The two most common rates are
13.5 %: Applies to property sales and certain other services.
21% Applies to most products and services not qualifying for the 13.5% rate.
Certain goods and services qualify for a 0% rate of VAT.

How to Calculate your V.A.T. Liability

Simply multiply the net amount by 1 + VAT % (i.e. multiply by 1.23 if VAT is 23%) and you’ll get the total chargeable to the customer.
For Example
Amount on which Vat is chargeable €1,000 by 1.23 = €1,230
Vat @23 %                                           €230
Total chargeable to the customer       €1,230

When do I pay and file my Vat returns?

Once you are registered for VAT purposes the Revenue Commissioners will issue VAT return forms to you. The calendar year is divided into six VAT periods i.e. January/February, March/April, May/June and so on for the year. However a new simplified payment arrangement for VAT has been introduced by the Revenue. The new arrangement consists of biannual filing and payment where total VAT payments for the year are €3,000 or less, and fourmonthly filing and payment where total VAT payments for the year are between €3,000 and €14,000.The future schedule for VAT payments and returns will be as follows:
Total VAT payments for the year of less than €3,000

Tax Period Frequency File & Pay
July /December 2010 BiAnnual BiAnnual VAT 3 return and payment (if due) by 19th January 2011.
January/June 2011 BiAnnual BiAnnual VAT 3 return and payment (if due) by 19th July 2011.
July/December 2011 BiAnnual BiAnnual VAT 3 return and payment (if due) by 19th January 2012.

Total VAT payments of between €3,000 and €14,000 for the year

Tax Period Frequency File & Pay
September/December 2010 Four Monthly 4 Monthly VAT 3 return and payment (if due) by 19th January 2011.
January/April 2011 Four Monthly 4 Monthly VAT 3 return and payment (if due) by 19th May 2011.
May/August 2011 Four Monthly 4 Monthly VAT 3 return and payment (if due) by 19th September 2011.
September/December 2011 Four Monthly 4 Monthly VAT 3 return and payment (if due) by 19th January 2012.

Payment and filing requirements will continue on a similar basis thereafter.
When a business is VAT registered it is collecting VAT from its customers and also paying out VAT on its costs.
The VAT return form is very simple and easy to complete. The return form should be sent directly to you by the Revenue.
You should obtain VAT invoices for all business expenses incurred on which VAT was charged to you. These invoices are needed to complete your VAT return.
You divide your invoices by date order into the relevant VAT period e.g.

Invoice date 28th February VAT period January/February
Invoice date 1st March VAT period March/April

If you qualify for the new arrangements for completion of VAT returns as explained above use the new longer VAT period as appropriate.
Summarise the total amount of the VAT incurred according to your invoices for the VAT period in question, which is called your VAT on Purchases. The total is entered in Box T2 on the VAT return form.
Assuming you account for VAT on the cash receipts basis your sales VAT will be based on your receipts from debtors for each VAT period. This is known as your VAT on Sales. The total VAT is entered in Box T1 on the VAT return form.
You then deduct the VAT on Purchases figure from the VAT on Sales figure and the result will either be a refund due to you (Box T3 on the VAT return form) or an amount owed to the Revenue (Box T4 on the VAT return form) depending on the amount of your VAT claims for the period.
As an alternative to completing VAT returns during the year you can elect to go on a yearly VAT return combined with a monthly direct debit in favour of the Revenue. You will have to estimate your VAT liability for the year ahead and allowable VAT expenses and then balance out the figures in the yearly return. Any overpaid VAT would of course be repaid after the end of the tax year. In practice most people stay with the completion of the bimonthly VAT returns as it ensures that the correct amount of VAT is paid during the year and also ensures that the job is dealt with on an ongoing basis rather than having to work out a yearly return after the end of the year.

Calculating Business Profits for Tax Purposes

March 23, 2020

Small businesses rarely use detailed accounting systems and in reality for a “one man show” a sophisticated accounting system is not required. The Revenue (Tax Office) will require you to provide sufficient information to show how you calculated your profit and to have invoices/receipts in support of your figures.

Our Self Employed Income calculator will do the work for you and produce a simple Profit & Loss Account for the year and also calculate the tax allowance due for cars, and equipment used in running your business.

The following is a brief summary of the required steps for a small business when calculating their taxable profit.

Step 1: Total all sales invoices for your accounting period. Invoices must be issued on a timely basis throughout the year.

Step 2: Identify all your business expenses incurred during your accounting period. For a small business these will normally consist of the following;

  • Salaries paid to employees e.g. spouse or children.
  • Telephone/ Mobile
  • Travel
  • Motor Expenses
  • Rent for premises
  • Insurance
  • Light and Heat
  • General office costs e.g. stationery, postage etc.
  • Any other expenses incurred for the running of the business.

 

Step 3: Deduct the total for Step 2 from the total for Step 1 and that is your business profit.

Step 4: You have to add any element of private expenses to your business profit to arrive at your profit for income tax purposes. e.g. Motor Expenses personal use 1/5th of total then add 1/5th of your motor expenses to your profit at Step 3.

Step 5: Calculate your annual allowance for cost of equipment used in the business e.g. computers, cars etc.

Special Rules when Ceasing Business

March 23, 2020

If you have been trading as a Sole Trader and any of the following happens then your income tax position needs to be examined: ? Cease or Retire from the business ? Sell the business ? Take on a Partner ? Transfer the business to family members. ? Convert business to a limited company If any of the above applies then special rules come into play which affect your tax liability for your last two tax years. You may recall we explained the special rules regarding accounting dates for when you commenced business. When you cease in business the reverse of these rules apply. If your accounting date is the 31st December in tandem with the end of the tax year then the rules will not affect you. On the other hand if you use an April accounting date then the special rules will apply.

How these rules operate can be best explained by an example. Example of Special Rules when Ceasing Business Assumptions ? Business ceases on the 31st December 2011. ? Prior to this accounts prepared to 30th April each year. Net Profit for Tax Purposes Taxable Profit Year to 30th April 2010 €40,000 Year to 30th April 2011 €60,000 7 Months to 31st December 2011 €55,000 Total Taxable Profits €155,000 Initial Tax Assessments (assumed business continues) Year 2010 based on Accounts 30th April 2010 €40,000 Year 2011 based on Accounts 30th April 2011 €60,000 Total €100,000 New Tax Assessments (because business ceased) *Year 2010 Profits to 31st December 2010 €58,350 Year 2010 – Profits to 31st December 2011 €60,000 Total €118,350 *You can see that because the business ceased in December 2011 the amount of taxable profits for tax year 2010 increased by €18,350. TAX SAVING TIP If you have control over when you cease business you may be able to avoid any increase in tax liability as a result of same. In the example if the business had continued to Jan 2012 no additional tax would arise for the tax year 2010 thereby saving circa €9,000. How these rules affect you will depend on your own particular circumstances. If you have plant and equipment e.g. company cars, vans, machinery etc, which you used in the business and the cost of them has been claimed for tax purposes then what happens them when you cease business needs to be considered. If you sell them you may owe VAT and in addition pay tax on all or part of the sale proceeds, which depends on the tax value of the items concerned. This will likely only be of significance if the plant and equipment etc. involved has a substantial resale value. Professional advice should be sought well in advance of ceasing business to see if steps can be taken to reduce or eliminate the impact of the special income tax rules for ceasing business. We can provide this service by way of consultation subject to an extra charge.

Family Members Working in a Business

March 23, 2020

Quite often a spouse and children can be gainfully employed in a business. This can help reduce the overall tax due on the business profits and at the same time retaining the same income with less tax payable within the family.
There are both Income Tax and PRSI implications involved where family members are employed in the business, which we explain below first of all in respect of spouses and then children.

Spouses
A spouse could be either employed in the business or made a partner in the business with you. This would give them an income, which of course is taxable. However since the introduction of individualisation a spouse can earn income up to €23,800 for 2011 and only pay tax thereon at the 20% tax rate. If you pay Tax /PRSI/USC at the top rates this will yield an annual tax saving of approximately €5,500 for the year.

The amount which you could pay a spouse for earlier tax years for maximum tax saving was as follows €25,000 for year 2007, €26,400 for year 2008 and, €27,400 for 2009 & 2010.

Generally speaking a persons spouse is nearly always involved in some shape or form in the running of a small business so there should be no difficulty in justifying a salary payment for income tax purposes.  For PRSI purposes a person who is directly employed by their spouse is not considered to be in insurable employment so no Employers PRSI payments are due.

Taking your spouse in as a partner in a sole trader business has various tax implications as you are treated as starting a new business in partnership which requires new tax registrations etc etc and should not be done without taking professional advice. We can provide this advice which will be subject to an extra charge.

TAX SAVING TIP
A tax saving of €5,500 approximately per annum can be achieved by employing your spouse in the running of your business or by making them a partner in the business with you.

Children
Some businesses lend themselves better than others to employing young children of the owner in carrying out genuine work for the business e.g. small supermarket stacking shelves, shops etc. In other cases it is not unusual to find that children are more technologically advanced than their parents and will often provide assistance to parents who work from home in dealing with computers, emails, typing etc.

Once a child performs a genuine task for the business and is paid a normal salary then that salary cost qualifies as a normal taxdeductible expense for the parents business. The child can then use this money as they see fit e.g. educational expenses, holidays, pocket money etc.

A child can earn up to €8,250 per annum free of tax for the year 2011. If they work full time in the business they can earn €16,500 taxfree. Assuming your child provides genuine assistance to you in running your business on a part time basis you could pay them €150 per week free of tax, which in turn could reduce your tax liability by €80 per week. However the PRSI/USC implications of employing your children need to be considered.

No PRSI charges are due if the child is under 16 years of age or if over 16 carries out the work at home where the business is carried on.

The childs salary will be liable for the USC charge but at the lower rates.

TAX SAVING TIP
A child may be employed part time in the business and could earn up to €150 tax free. If you pay Tax/PRSI/USC at the top rates it will save you €80 per week.

Choosing Accounting Dates

March 23, 2020

This is a very important matter and needs to be carefully considered once you have commenced business. Your taxable profit will be based on a twelve month period ending in the tax year.
The tax year runs on a calendar year basis and each tax year ends on the 31st December.
You must choose an accounting date during the year to which you will make up your accounts e.g. 12 months to the end of December or 12 months to the end of January or 12 months to the end of February and so on.
The two most popular dates in the year tend to be the end of December or the end of April ( for historic reasons when the tax year used to end on the 5th April).

Accounts made up to end of December
This means your accounts will run in tandem with the tax yearend and most people use this  date. This is particularly important for individuals who suffer substantial withholding tax on their earnings e.g. medical consultants, dentists, consultants providing services to Government Agencies etc.
You pay your tax in October each year based on your profits to end of December in that year e.g.
Accounts to end of December 2010 – Tax due October 2010
Accounts to end of December 2011 – Tax due October 2011

Accounts made up to end of April
After the initial start up rules you will be paying your tax each October based on your accounting profit to the end of April e.g.

Accounts to end of April 2010 – Tax due October 2010.
Accounts to end of April 2011 – Tax due October 2011.

The benefits of using an April  accounting date are:

  • In a start up situation when profits are likely to be low it defers the tax payment date for as long as possible, which helps cash flow.
  • You have time to prepare your accounts before the tax is due for payment in October.
  • As you will know your taxable profit for the year early in the year it gives you time to consider the making of investments to reduce your tax liability.

The choice of your first accounting date will be influenced by your anticipated profits and whether or not you suffer withholding tax on any of your earnings. Most small businesses take time to generate substantial profits. Assuming profits are likely to grow on a gradual basis and that you do not suffer any significant withholding tax, then the end of April is likely to be the optimum date for preparing your accounts for tax purposes.

Example Choosing Your First Accounting Date
For a Start up position:
Choice depends on

  • Initial profitability
  • If withholding tax due on income.

Assuming there is no withholding tax deducted lets look at the following example:
Started on 1st September 2009

Estimated Profits
September December 2009

Nil
January December 2010

€20,000
January December 2011

€40,000

Question What is the best accounting date to use for tax purposes?
Answer The first accounts should be prepared for the period from September 2009 to April 2011. Thereafter accounts should be prepared to April each year.

Question Why April as Compared to December?

Answer Lets answer this in reverse. If we had used December as the accounting date no profits arose for the first tax year, 20098. This means the tax credits for this period are lost together with the benefit of the lower (20%) tax rate.
For tax year 2010 tax would be payable based on profits of €20,000 and for tax year 2011 tax would be based on profits of €40,000.
By using April 2011 as the first accounting date the profits on which tax is based for the first three years i.e. tax years 2009, 2010 and 2011 amounts to €38,500. This compares to profits of €60,000 if a December yearend had been used.

Tax Saving by Using April 2011

Assume single person with no other income

Using an Accounting Date in December January
Tax Due for Year 2009

Nil

Nil
Tax Due for Year 2010

€3,000

€1,715
Tax Due for Year 2011

€12,300

€1,715
Total Income Tax Due

€15,300

€3,430
The difference in tax payments is almost €12,000.

You can see from this example the difference in tax payments for the first 3 tax years is significant with a very substantial tax saving achieved by using an April accounting date as compared to a December accounting date.

If you are starting a business and need advice on how to choose the most tax efficient accounting date we can provide same by way of consultation subject to an extra charge.

Sole Trader or Limited Company?

March 15, 2018

The first question to be considered is whether you carry on business in your own name, i.e. Sole Trader or through the medium of a Limited Company.

As a Sole Trader you are personally liable for all the debts of your business. If the type of business you are engaged in leaves you open to be sued for substantial damages in the event of errors or mistakes then you should consider trading through a limited company.

To illustrate the point consider the position of a plumber who installs central heating systems. If the boiler subsequently blows up serious damage could be caused. This plumber should trade through a limited company to avail of the limited liability status of a company so that his personal assets are not exposed in the event of business failure. On the other hand a selfemployed painter is unlikely to require limited liability to the same extent as the plumber.

For Administration purposes a limited company involves more “red tape” as the company has to make its own tax returns and returns to the Companies Office. On the positive side, if the business is going to make substantial profits in excess of your own salary requirements then these profits will be taxed at the 12.5% tax rate as against the top 52.5% rate for a sole trader.

In addition pension funding rules can be better for a company as compared to a sole trader. It is important to consider this matter in detail and if in doubt seek professional advice. We can provide this service on a consultancy basis for which an extra charge will arise.

The three year tax exemption for new limited companies should be considered. This is explained in more detail in Section 4 below.

 

We can provide further advice on this matter by way of consultation.

Or

Form Your Own Company with freecompanyformations.ie Now .

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