It is fast approaching that time of the year again when tax matters loom their head and the frantic search begins for all the relevant information. In the past few years the process of filing Income Tax returns has been eased by the introduction by the Revenue of online filing facilities. However, although the Revenue have attempted to make the process easier, it is still important for all individuals to be aware of their obligations in this regard.
Personal Income Tax:
- Balance of Income Tax for 2005 plus
- Preliminary Tax for 2006 plus
- Capital Gains Tax for disposals from 1 January 2006 to 30 September 2006
The payments above must be made by 31 October 2006 unless the return is filed and the payment is also made online, in which case the deadline is the 16 November 2006. Note for a Capital Gains Tax incurred between the 1st October 2006 and 31st December 2006 the payment deadline is 31st January 2007.
Corporation Tax
- 21st day of the 11th month of the Company's accounting year.
All Chargeable Persons. This includes all Sole Traders, Partners and Company Directors.
It also includes a Companies which are separate legal entities.
Personal Income Tax:
31st October 2006, if filing a return in paper format by post
16th November 2006, if filing and paying online via ROS (now confirmed).
Corporation Tax:
21st of the ninth month after the Company's Accounting year end.
31st October 2006, if filing a return in paper format by post
17th November 2006, if filing and paying online via ROS (subject to confirmation).
A 2005 Income Tax Return filed before 31 December 2006 is subject to 5% of the outstanding tax liability, subject to a maximum of €12,695
A 2005 Income Tax Return filed after 31 December 2006 is subject to a 10% of the outstanding tax liability, subject to a maximum of €63,485
A 2005 Corporation Tax Return due on 21st September 2006 and filed tbefore 21st December 2006 is subject to 5% of the outstanding tax liability.
A 2005 Corporation Tax Return filed after 21st December 2006 is subject to a 10% of the outstanding tax liability.
In the case of a director the surcharge is calculated on the liability before taking into account PAYE paid during the year.
Example:
Company Director total Income tax liability €20,000
PAYE already paid €18,000
Outstanding Liability €2,000
If the return is submitted late a surcharge of €1,000 will apply (€20,000 x 5%). The calculation is not on the outstanding amount in this case.
Penalties for late payment
Interest will be charged at a 0.0322% per day on underpayments.
The first section of the Income Tax return deals with the various sources of Income that can arise. When an individual is self employed their main source of income will normally be one of the following:
- Profit form sole trader accounts
- Share of profit from partnership accounts
- Directors salary and other benefits
The other most common sources of income that arise are rental income, dividends from Irish and UK companies and deposit interest.
Although deposit interest is subject to tax at source it is still necessary to include details of the amount earned on your Income tax return. However, where tax has been deducted at 20% there is no further liability to Income Tax.
Irish dividends are also subject to a deduction of tax at source. It is necessary to return the gross amount of the dividends for the year. This amount is taxed at your higher rate of Income Tax but you are given a credit for the tax already deducted.
UK dividends are subject to UK tax at source. However, this amount is ignored completed and you are required to return details of the net amount of the dividend i.e. the amount you received in cash. This amount is taxed at your higher rate of tax.
Rental Income
Where an individual receives rental income from any property they are required to return the details of this income on their income tax return. The amount to be returned is the gross amount of the rent received. However, this figure can be reduced by the following expenses:
- Interest on monies borrowed to purchase or repair the property. It is important to look at what the money borrowed was used for, rather that what property money is secured against. When deciding whether to allow the interest relief the Revenue will look at how the money was spent rather than where it came from.
- Cost of goods and services provided in relation to the letting i.e. gas, electricity, telephone rental, cable T.V.
- Management fees and letting fees
- Legal fees in relation to drawing up leases and rent collection
- Insurance costs
- Repairs and maintenance fees i.e. repainting and decorating, mending broken doors, windows, furniture etc.
- Certain mortgage Protection premiums
- Wear & tear on furniture – the cost of providing furniture can be written off at a rate of 12.5% per annum. A list of expenditure incurred should be retained each year.
No expenses incurred prior to the date of the first letting is deductible with the exception of legal fees & letting fees incurred in getting the tenant. In addition expenditure on furniture and fittings would also arise before the first letting. No expenses incurred after a period of letting ceases is allowed as a deduction. However, where there is a gap between lettings expenses incurred during this period are allowed provided the landlord does not occupy the premises during this time.
The rules for determining income of a Limited Company, which is subject to corporation tax and for calculating the various amounts of income of a company are similar to the rules for calculating the income for individuals, sole traders and partners.
Companies, under special conditions can claim relief from Deposit Interest Retention Tax and can receive their interest income gross.
There are also special rules for the treatment of franked investment income, dividend income. In the case of "close" companies, there are surcharges for non distribution of investment income within 18 ,onths of the company's year end.
Companies are not entitled to tax credits, allowances and reliefs normally given to individuals as discussed in the following paragraphs.
When an Income Tax return is filed it is an opportunity to claim annual allowances and reliefs. The following sets out a number of common (and some not so common), but sometimes overlooked relief’s that are available to claim.
Tax relief at source
In the past number of years Tax Relief at Source (TRS) has been introduced for both Mortgage Interest and Medical Insurance. This effectively means that the cost of each of these is reduced by the tax relief available on them. For this reason they are generally no longer required to be returned on your annual income tax return.
Medical Expenses
The cost of GP’s, consultants, hospital visits or stays, physiotherapy, nursing home costs, certain non routine dental costs and prescription medication are coved by this relief, (these being the most common, but not an exhaustive list, of expenses).
The cost must be reduced by amounts reimbursed from any source (e.g. VHI, Bupa or Health Boards). In addition the first €125 for a single person or €250 for a family must be deducted.
The relief for medical expenses is available at your marginal rate of tax, thus making it a very valuable relief. Many people do not claim these expenses as they do not have the relevant information. I would suggest that you have an envelope set aside and that you put receipts from doctors, chemist etc. into this throughout the year. At the end of the year most people will be surprised and the amount accumulated, particularly those with young families.
One of the areas often overlooked is relief for nursing home care for an elderly parent. In order to claim the expenses it is necessary for the parent to qualify as a dependant relative and their income must also be taken into account in calculating the amount of fees that qualify for relief. Given the cost of nursing home care this can be a very significant relief where it applies.
Pension
Pension contributions are also allowed at the individuals’ marginal rate. The maximum contributions allowed in a year are as follows:
- Under 30 years of age 15%
- 30- 39 years of age 20%
- 40-49 years of age 25%
- Over 50 years of age 30%
The contributions are subject to an overall earnings cap of €254,000 p.a.
In claiming relief for pension contributions it is possible to claim the full amount paid in the relevant tax year plus any amount paid before the following 31 October.
For example: For the tax year 2005 you can claim any amounts paid from 1 January 2005 to 31 October 2006. Any amount paid in 2006 must also be claimed by 31 October 2007. This allows you to top up your pension payments for a year before filing your return and paying your Income Tax. Effectively you get immediate relief for this contribution.
Permanent Health Insurance
This is a very important consideration for self employed individuals as it provides a stream of income for the individual in the event of ill health. Premiums paid for PHI policies are allowed at the marginal rate of tax, subject to a maximum premium allowed of 10% of income.
Charitable Donations
Relief is available for donations of €250 or more to approved charities. The relief is available as follows:
Self employed individuals
- Relief @ 20%. Donate €500 – tax relief €100
- Relief @ 42% Donate €500 – tax relief €210
PAYE individuals
Relief granted to the charity as follows:
If you donate €500, the charity can claim from the Revenue:
- from a lower rate tax payer the charity can claim €125.
- from a higher rate tax payer the charity can claim €362.
New shares Purchased by Employees
Tax relief at the marginal rate can be claimed on the purchase of new shares by employees or directors. The maximum lifetime deduction allowed is €6,350. There are certain conditions that apply to this relief but it can be useful when starting up a new company that requires some cash input.
In addition to the above there are relief’s available for the following:
- Service Charges,
- College Fees,
- Home Carers Credit,
- BES investments,
- Film Investments,
- Rent Credit and Trade Union Subscriptions.
For self employed individuals it is necessary to file an annual income tax return in order to avoid penalties and surcharges. Register as a personal tax payer...click here
For Limited Companies it is necessary to file an annual corporation tax return in order to avoid penalties and surcharges.
Register as a business or corporate tax payer ... click here
However, by putting aside some time to complete the task correctly it will be possible to ensure that you are reducing your Tax bills to a minimum.
