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+ 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

+ 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

+ 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

+ 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

+ 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

+ 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

+ 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

+ 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

+ 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

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

+ 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) Tax5,590 PRSI/USC 11% 3,850 Total9,440(9,440)= 27%

+ 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 12 th November On that day: (i) File 2014 Tax Return and pay balance of tax (ii) Pay preliminary tax for 2015

+ 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

+ 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%

+ Taxation update and summary In general sole trades are (i) Easy to set up and wind down (ii) Little oversight and regulation (iii) 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 (i) No limitation on liability if sued by third parties (ii) Tax on profit rather than drawings (iii) Difficult to have a business “asset” to sell on in future

+ 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

+ 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

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

+ 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

+ 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

+ 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

+ 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

+ 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

+ 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 !

+ 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

+ 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%

+ 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

+ 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%

+ 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 !!

+ 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: (i) An individual who is in receipt of PAYE source income only (ii) An individual with some non PAYE income (max €3,174) and coded in to be taxed at source (iii) Ignore deductions that may apply when arriving at the €3,174 Directors must do a Tax Return also with some exceptions

+ 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

+ 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 No tax relief on interest on new loans after 15/10/13 75% of existing interest allowed in Interest on loans to invest in companies already phased out

+ 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

+ 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

+ Thank you Any questions ? Alan Lawlor FCCA AITI Contact on or 087/