Worldwide Tax Ireland Tax Deductions - Essay Example

Dear Peter, I have received your message informing that you intend leaving your current job with the computer software company and venturing into your own business of providing computer services and computer training. By becoming self-employed you have to consider all the advantages and disadvantages of carrying on your own business rather than working for an employer. Being self-employed means you are in control of what you do and are able to organise your schedules. It also presents many opportunities, perhaps the utmost being a fresh start to life, of a self-managed enterprise and entrepreneurship. But at the same time you must keep in mind that starting out in self-employment poses many difficulties and you would have to work very hard with no guarantee of a regular income. But first of all you must assess for yourself if you are suitable for self-employment which requires total self commitment, ability to work long business hours which in turn requires physical and mental strength and, last but not the least, complete support from your family. Then you have to do market research to identify the opportunities available in your selected field. Since you are currently employed with a computer software company it is obvious you have the technical skills, but do you have the business skills to run your business. If you lack these skills you shall have to learn them fast from the information that I am about to provide you and from other sources. When you start out on your own in business you can do so as a sole trader, in partnership or by setting up a limited company. You have indicated that you wish to start your business as a sole trader, which means, you intend to set up your business on your own. Starting out as a sole trader is relatively easy and straightforward but if your business fails your liability is unlimited or in other words all your assets will be legally available and can be used to pay your creditors. If you intend to start your business from your home you are likely to be requiring Planning Permission. In case you are going to use one or two rooms in your home you would need to apply for a partial change of use from domestic to commercial purpose. In case you intend constructing a shed or additional room for your business you may require planning permission for which you shall have to contact your local authorities. Market research is very important before you set up your business in your chosen field but let me caution you that no amount of research will guarantee you success. However, your market research must concentrate on your potential customers, potential competitors, quality of services to be offered by you, it’s pricing, and whether you can procure business from large enterprises. An easy way to find out about your potential competitors is by looking up the Golden Pages. Once you are satisfied that there is a potential scope for your business you must prepare a business plan. I trust that the following information shall prove useful for this purpose. You can also get important information from the internet. At the very outset you shall require capital. You shall be required to purchase a number of computers, some office furniture and, ofcourse, a car. You are unlikely to get any of these on credit simply because the suppliers don’t know you and have never done business with you. The most likely place to get a loan is the bank or a reliable financial institution. However, you must remember that the recent recession has hurt almost every bank very badly and it may not be easy to get credit or an overdraft facility from the bank. This is where the importance of a good business plan comes in to be able to convince the bank to release a loan to you. The business plan must clearly spellout about yourself, your technical qualifications, experience, your business, how you intend to promote it, what market research you have done and the most important aspect being the financial side of your business. This shall include a business plan and a cash flow statement of your proposed business. All this may appear very daunting but with the information I shall be providing, you can even do it yourself. In fact the business plan should be prepared by you yourself as it will give you very important insight into this critical side of your proposed business and the belief that you can make a success of it. However you can get professional assistance for preparing the cash-flow statement. The next step would be to meet your bank manager and hand over your business plan. You must be thoroughly familiar with the business plan to be able to answer all the queries that the bank manager may have for you. Apart from applying for a loan from the bank there are a few organisations that give small grants. You may be able to obtain a small grant from your Local Development Company. Your County Enterprise Board also gives grants to certain eligible projects and the DSFA Facilitators also offer small grants from the Technical Assistance and Training Fund which is usually given for necessary equipment, marketing, suitable training or for Public Liability Insurance. However this is available only to self-employed entrepreneurs who participate in the Back to Work Enterprise Allowance (BTWEA). You may also consider approaching an organisation which has a mission to creat tiny enterprises through self-employment. This is the First Step Limited based in London which provides loans to small enterprises which are unable to access loans through regular financial channels. Normally loans of upto €25,000 are provided for upto three years on nominal rate of interest. This organisation does not require security and covers practically every field. But here too a business plan is essential. However it is essential that whatever be the source of loan, you must repay the loans alongwith interest regularly and on time. Cash-flow Statement (CFP): It is an estimate of your income and expenditure over a period of twelve months set out in such a way that you can easily access the estimated bank balance at the end of each month. The CFP has many advantages as it gives you the breakeven point of your business, the amount of money required for overheads; you can compare your actual performance with your projections; It is a vital part of your business projections and the banks and financial institutions give it the importance it deserves. Business Plan: A business plan is an essential document as it translates the business plans from your mind onto paper. It gives your financial requirements, how much of it can be invested by you, how much do you need to borrow from the bank, how you will pay back the loan etc. Registeration: Now we come to the actual process of registering for the business. You will need to register with the Revenue Commissioners by using their TR1 form. This form is required to register you as a legal ‘person’ for the purpose of Income Tax, VAT and an employer for PAYE/PRSI. A ‘person’ in your case shall be as an indivdual but this term also includes partnerships, trusts and unicorporated bodies. The TR1 form is available from the Revenue Commissioner’s office and is returned to them after completing it. On receipt of the completed TR1 form the Revenue Commissioners will forward you a "Notice of Registration" which confirms your registeration for income tax and, if suitable, for VAT and PAY/PRSI. This will also provide your Tax Registration Number and the effective date of registration. Every small business is also legally reqired to be registered with the Health and Safety Authority who provide the guidelines to prepare a Health and Safety statement which is required to be displayed in your business premises. You shall also be required to register your business name in Form RBN1 with the Companies Registration Office in Dublin. After registeration the Companies Registeration Office will provide you with a registration certificate which is also required to be displayed prominently in your business premises. Once you are registered as a sole trader you have the obligation of preparing tax returns for the Revenue Commissioners once a year for the period Jan 1 to Dec 31 coinciding with the calendar year. The tax returns will include your annual turnover, your legitimate business expenditure and details of the persons employed with you and the wages paid to them. Income Tax: Now I come to the subject of income tax. As you have been employed yourself, you have been on the Pay As You Earn (PAYE) system. Depending on how you were receiving your wages, that is, weekly, fortnightly or monthly, you would be receiving wage-slips showing the deductions on account of Income Tax and PRSI. At the end of the year you would have received a P60 from your employer showing the total income tax and PRSI deducted from your wages during the year. However, now as a self employed individual the system of taxation will change. At the end of the year you shall receive a “File and Pay” tax return form the Revenue Commissioners. This form will require you to file a return showing your annual turnover and the legitimate business expenses. A self-employed individual is obligated to pay 90% of the tax forecast for the year by November 1, or an amount that is identical to the tax he paid in the previous year. Annual returns must be filed by January 30. Fines are imposed for arrears in filing an annual return at the rate of 5% of the tax on returns submitted by March 31. The fine is 10% in the case of returns submitted after March 31. In computing your trading or professional profits, you may deduct legitimate business expenses, including expenditure on trademarks, and know how, pre-trading expenditure, and pre-commencement staff training costs, the cost of establishing an approved savings-related share option scheme for employees. However, you may not deduct private expenditure, capital expenditure or entertainment expenditure. The PAYE system obliges an employer to deduct tax at source from the wages and salaries of his employees.  Pension contributions are subject to prescribed limits whether Personal Retirement Savings Account (PRSA), or a self-employed retirement annuity scheme. Losses: If you make a trading or professional loss, you may reduce your income from all sources by the amount of the loss. Any unused balance may be carried forward against your trading or professional income for the next and later tax years. Self assessment: If you are self-employed, you must pay preliminary tax on or before the preliminary tax date, i.e., 31 October in the tax year, and file an income tax return on or before the return filing date, i.e., 31 October following the tax year to which the return relates. Audit: You must keep records that will enable you to make a true tax return. This means you must keep a cash receipts book, a cheque payments book, a sales book, a purchases book, a register of assets and liabilities, and a record of asset acquisitions and disposals. Records may be stored electronically. Self-employed PRSI (Pay Related Social Insurance): The minimum contribution is €253 per year. On top of your income tax, you must also pay class S (self-employed) PRSI contributions. This is calculated and paid at the same time as your annual income tax. The rates are: 3% PRSI on Net Profit Plus 4% Health Levy on all income between €26,000 a year to €75,036. Health levy (for both employees and self-employed): If you earn €500 or less per week, i.e., €26,000 per year, your income is not liable to the health levy. If you earn more than €500 per week, your income is liable at 4% with no ceiling. If you earn more than €1,443 per week (€75,036 per annum), your income is liable at 5%. Income levy (employees, self-employed): Since 1 January 2010, an income levy applies at the rate of 2%, 4% or 6% depending on the level of income. Exemptions: The levy does NOT apply where Individual’s income is less than €15,028 per year. VAT: You are potentially accountable for Irish value added tax (VAT) if you are a taxable person who engages in the supply of services, within the Republic of Ireland for consideration in the course or furtherance of business. You supply a service when you engage in the performance or omission of any act, or the toleration of any situation other than a supply of goods. You are a taxable person and must register for VAT if your turnover from the supply of taxable services exceeds, or is likely to exceed € 37,500 in any continuous 12 month period. VAT is not charged on an exempted activity including educational activities. VAT rate is 21% which is the standard rate. This rate (effective 1 January 2010) applies to goods and services that are not exempt, or specifically liable at 0%, 5.2%, or 13.5%. Employing staff: To register with the Revenue Commissioner in Form TR1 Self-employed trader must pay the minimum salary of € 380/week effective 1.7.2007. They are entitled to 4 weeks paid holidays plus the statutory holidays. The employer must deduct the employee’s income tax, employee’s PRSI and Employer’s PRSI. Allowable expenses: Claim for any business expense which you have incurred in order to earn your profits. These expenses are normally referred to as revenue expenditure. Revenue expenditure is your day to day running costs and covers such items as purchase of goods for re-sale, wages, rent, rates, repairs, lighting and heating, etc., running costs of vehicles or machinery used in the business, accountancy fees, interest paid on any monies borrowed to finance business Expenses / items, lease payments on vehicles or machinery used in the business. Claim for pre-trading expenses: A business can claim for certain pre-trading expenses when calculating the trading income. A deduction is available for pre-trading expenses which are incurred in the three years prior to commencement of the trade or profession, or would not normally be allowable. Examples of pre-trading expenses are accountancy fees, advertising costs, costs of feasibility studies, costs of preparing business plans, rent paid for the premises from which the business operates. Disallowable expenses: The general rule is that you cannot claim for any private expenses, i.e. any expense, not wholly and exclusively paid for the purposes of the trade or profession, any private or domestic expenditure, e.g. your own wages, food, clothing (except protective clothing), Income Tax, etc., business entertainment expenditure, i.e. the provision of accommodation, food, drink or any other form of hospitality. You cannot deduct capital expenditure in calculating your taxable profits, however, you can claim what are known as Capital Allowances on certain expenditure such as cost of meals taken at the place of business which is not allowable for tax purposes but meals taken on business travel is allowable. Where expenditure relates to both business and private use, only that part which relates to your business will be allowed. You can claim a deduction for the running expenses of a vehicle used for business purposes. When you use a vehicle for both business and private purposes, a split of both the capital allowances (wear and tear) and running expenses has to be made. To ensure that this split can be properly calculated, you will need to keep records of your total mileage for the year and the total number of miles travelled for business purposes. Journeys between your home and regular place of work are treated as private and not business. If you lease an asset for business use, you can claim a deduction for the lease payments as a business expense. If the leased asset is a motor vehicle and the list price is more than £24,000, the allowable amount will be restricted as follows: Leasing charges x £24,000 Retail price of vehicle Capital allowances: In computing tax due on your business profits, you do not get any allowance for depreciation of business assets. Instead, you get a capital allowance over several chargeable periods until the cost of the asset has been fully allowed. Capital allowances are computed exclusive of grants and VAT. Expenditure on computers and office furniture used in your business is given an annual wear and tear allowance of 12.5%. A similar allowance is given for expenditure on software. A car (new or secondhand) costing over €24,000 is given an annual 12.5% wear and tear allowance as if the car’s purchase price were €24,000. As regards cars bought or leased on or after 1 July 2008, the capital allowances, and leasing deductions, are based on the level of carbon emissions. Cars with emissions above 190g/km get no allowance. In addition to PRSI payments, which go towards providing a Social Welfare pension on retirement, you can make provision for your personal pension/retirement income by taking out a Revenue-approved Retirement Annuity Contract. You can also make contributions under a Revenue-approved policy providing for a lump sum on death before a certain age. This is known as a Life Policy. Tax relief, subject to certain restrictions, is available at your highest income tax rate on premiums paid under both. The overall aggregate annual tax relief, i.e. for both a Retirement Annuity Contract and a Life Policy is 15% of Net Relevant Earnings, i.e. earnings from self-employment after deducting any losses or Capital Allowances. With effect from 2007 the existing ‘earnings’ ceiling of €254,000 for the purposes of tax relief on contributions to a pension product will be indexed in line with an earnings factor. Contributions paid into a Personal Retirement Savings Account will benefit from tax relief at an individual’s highest income tax rate. An earnings cap of £254,000 (2006 earnings limit)* will apply also to PRSAs, as with Retirement Annuity Contracts. References 1. Business and Company Formations Limited: http://www.businesscompanyformations.ie/soletrader.htm 2. Citizens Information-Public Service Information-Provided by the Citizens Information Board: Becoming self-employed http://www.citizensinformation.ie/en/employment/types_of_employment/self_employment/self_employment_as_an_individual.html 3. Citizens Information-Public Service Information-Provided by the Citizens Information Board: Setting up a business http://www.citizensinformation.ie/en/employment/types_of_employment/self_employment/setting_up_a_business_in_ireland.html 4. Irish Lawand tax-news.com: http://www.lawandtax-news.com/html/ireland/jirlatdctx.html#scope 5. Ireland Tax Laws Tax System-WorldWide-Tax.com: http://www.worldwide-tax.com/ireland/ireland_tax.asp 6. Starting/Registering as a Sole Trader in Ireland: http://blog.parfreymurphy.ie/2010/04/registering-as-a-sole-trader/ 7. Starting in Business - A Revenue Guide it48.pdf 8. Taxation in the Republic of Ireland: http://en.wikipedia.org/wiki/Taxation_in_the_Republic_of_Ireland 9. Taxworld: http://www.taxworld.ie/taxes/ct/current/summary 10. Toil & Trouble: A Guide through the Maze of Self-employment 11. http://www.welfare.ie/EN/Publications/ToilandTrouble/Documents/toiltrouble.pdf 12. Worldwide-tax – Ireland Tax Deductions:http://www.worldwide-tax.com/ireland/ire_reduc.asp Read More