Understanding Taxation

As Benjamin Franklin observed: ‘In this world nothing can be said to be certain, except death and taxes’.

Businesses in Ireland are, in general, subject to taxation. Tax levels are normally set in the National Budget, which is published in December of every year.

It is your responsibility, as the business owner, to ensure that proper books and records are kept, that your business is tax compliant, and that tax returns are made annually. Failure to do so can result in fines in the form of interest and penalties being applied to unpaid and undeclared returns, and the risk of publication of names of defaulters.

The main elements of tax include: -

• Income Tax - On the profits of Sole Traders and Partnerships
• Corporation Tax - On the profits of Limited Companies
• Value Added Tax (VAT) - All businesses with turnover in excess of €70,000 (goods) or €35,000(services).
• PAYE/PRSI - Businesses having employees, including owner/directors.

VAT Rates

The rates of VAT in force at present are zero per cent, 4.8% (on livestock and greyhounds), 10%, 13.5% and 21.5%, according to the goods or services in question.

Certain goods and services are exempt from VAT. In general, persons supplying such goods and services e.g. schools, universities and hospitals, are treated as being exempt for VAT purposes.

Tax Registration

As a small business owner, you are responsible for registering your business for tax purposes with the Revenue Commissioners and, depending on the type of business entity, you must use the following forms: -

• Form TR1 (for Sole Trader, Trusts or Partnership)
• Form TR2 (for Limited Company businesses)

The above forms may be downloaded from the Revenue Commissioners’ web site (www.revenue.ie), or in hard copy from your local Tax District Offices.

Rates of Corporation Tax

10%: Certain companies have their profits taxed at an effective rate of 10%. This ‘manufacturing rate’ is in the process of being phased out but remains in existence for some companies until 2010.

12.5%: Trading income (see Guidance on Revenue Opinions on the Classification of Activities as Trading).

25%: Non-trading income [includes income chargeable under Case III (e.g. discounts, interest, foreign income), Case IV (patent royalties, miscellaneous income) and Case V (rental income from land and buildings in the State) of Schedule D]. Also included at this rate is income from activities that consist of working minerals, petroleum activities and dealing in, or developing land, other than construction operations.

Calculating Tax Due

When starting your business it is important to understand what amount of the profit will require to be paid in tax and, therefore, what expenses are allowable for tax purposes. Due to the difference in treating certain items for accounting and for tax purposes there is often a significant difference between the profit arrived at for accounting purposes and the amount that is liable to tax. This is because items that are allowable for the purposes of calculating your accounting profits may not be allowed for tax purposes. The key expenses that are allowed and disallowed in calculating the taxable profits of an individual or company include the following.

Allowable Expenses

You can claim for any business expenses that you have incurred 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 resale
• Wages, rent, rates, repairs, lighting and heating etc.
• Running costs of vehicles or machinery used in the business
• Audit and Accountancy fees
• Interest paid on any monies borrowed to finance business expenses/items
• Lease payments on vehicles or machinery used in the business.

Disallowable Expenses

• Any expense not wholly and exclusively incurred for the purposes of your business
• Any private or domestic expenditure e.g. 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 to clients or customers. However, entertainment of staff is an allowable deduction for tax purposes
• Bad Debts not proven to be bad
• Capital expenditure

Motor Expenses

You can claim a deduction for the running expenses of a motor vehicle used for business purposes.

Mixed Expenses

Where expenditure is incurred by both business and private use, only that part relating to your business will be allowed for tax purposes. Examples include: rent, electricity, telephone charges, heating oil etc., where a business is operated from the home. These expenses will need to be apportioned to exclude the element of private use.

Private Use of a Motor Vehicle

When you use a vehicle for both business and personal use, 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 personal and not business.

Capital Expenditure

‘Capital Expenditure’ is the term given to money spent on acquiring or altering assets that are of ‘lasting use in the business’. For example: the purchase, alteration or fit-out of a business premises, the purchase of plant, machinery, and vehicles. You cannot deduct the cost of this type of expenditure from taxable profit. You can claim capital allowances on capital expenditure incurred on items such as office equipment, business plant and machinery, vehicles and certain buildings (for example, industrial buildings).

Calculation of Capital Allowances

For plant and machinery, wear and tear is calculated at rate of 12.5%, straight line, of the net cost. The net cost is the cost less any grants and any VAT that can be reclaimed. Capital allowances for motor vehicles are also calculated at 12.5% per annum on a straight-line basis, however, restrictions apply for passenger motor vehicles, with capital allowances currently capped at €24,000, and may also be further restricted for the private use of such vehicles.

Taxable Income

Taxable profit is arrived at by adjusting your net profit figure for any items of expenditure that are disallowed for tax purposes and also adjusting for capital allowances. This is the figure that will be charged to tax. If it results in a loss, this may be set against other taxable income or carried forward to be offset against future profits.

Further Information

Business taxation and all its provisions is a complex matter. The Revenue Commissioners have an extensive website (www.revenue.ie) which contains much of the information required for your business. If you are unsure it is highly recommended that independent advice be sought early to avoid any potential difficulties.