Keeping on the right side of Revenue – the Top Ten tips for Business

Jan 15, 2018

Sunday Business Post, 14 January 2018
Business people have many roles.  They are entrepreneurs, salespeople, managers, recruiters, designers, builders, marketers.  Business people are also unpaid agents of the Revenue Commissioners.  Whether you’re just starting out in business, growing a successful SME, or working on the finances of a major multinational, you need to have tax responsibilities at the back of your mind all the time.  Almost €8 out of every €10 collected in tax in this country is collected by Irish businesses on behalf of Revenue.  Increasingly, the role of revenue authorities, not only in Ireland but across the developed world, is just to count and check. 

The tax collection figures for 2017 were at a record high, but there is a cost to making that happen. According to Revenue, some 647,000 “compliance interventions” were completed during 2017 which yielded €492 million.  A compliance intervention is any form of enquiry, audit or investigation on the affairs of the taxpayer, and the number of such interventions was up 15% on 2016.  There is not only a tax cost associated with this type of revenue enforcement activity. There is also a time cost for the taxpayer, and the disruption to normal business activity which is particularly galling if no tax mistake had actually been made. Revenue audits can be particularly disruptive, and can take months to resolve.

Furthermore, an increasing number of businesses rely on being able to produce a tax clearance certificate to secure new work or to retain existing work. Any business requiring any form of public license to carry on the trade – publicans, fuel retailers and the like won’t get a licence without producing a tax clearance certificate. Since the tax clearance verification process went online it becomes even more important to establish a tax compliance record right throughout the year and not just at the end of the year.  

At the more extreme end of things, there were 24 criminal convictions for serious tax and duty offences during 2017 with 301 settlements being published on the List of Tax Defaulters.   Finding yourself included in these numbers isn’t great for business either. 

For all these reasons it makes good and ethical business sense to stay as best as possible on the right side of the tax rules, and to be seen to be staying on the right side of the tax rules. Here are my top tips for being a good tax citizen and keeping Revenue off your back. 

1          Pay on time

It may seem trite and obvious, but consistently late tax payments ring alarm bells in the Collector General’s office.  It is far better to source finance from almost anywhere rather than making a late payment to Revenue. Interest on underpaid tax runs at 8% percent per annum (10% if VAT or PAYE is late) and the interest on late payment of tax isn’t tax deductible when calculating your income tax or corporation tax liability for the year.  Revenue make the banks look cheap. 

2          Watch your Payroll practice

Because the Exchequer is so reliant on PAYE (it brought in over €13 billion with employer PRSI on top of that last year) the penalties are very heavy if you get it wrong and the job itself is thankless.  Don’t expect good service from Revenue either if looking for help on any issue which is not totally routine. A change in last year’s Finance Act means that in 2018 it is now more costly for employers to correct PAYE errors as Revenue will be looking for a higher settlement amount.  The rules have become so tight that businesses should always think about whether they are obliged to apply PAYE to any payment made to an individual for a service. 

3          Change your payroll system in 2018

Almost all businesses have some form of payroll software or outsource payroll operations.  From the start of 2019, almost all businesses will have to use computerised systems capable of connecting directly to the Revenue computer systems to provide real-time information on their employees and their wages.  It doesn’t look like there is any way around this additional state-imposed cost to doing business.  

4          VAT Thresholds

If you’ve just started a new business, or set up as a professional on your own account, watch out for the way the VAT thresholds work.  A business providing more than €37,500 worth of services or selling more €75,000 worth of goods must register for and charge VAT.  Because VAT is calculated on turnover, the amounts of tax involved can get quite large as your business grows and develops.  Large amounts of tax means large settlements of interest and penalties should something go wrong. 

5          VAT Rates

Computerised accounting systems generally are good at handling VAT, so the main problems that can arise often have to do with applying the wrong rate of VAT in the first place.  Be particularly careful if you are operating in the food sector (which has myriad VAT rates often depending on the state of processing of the foodstuffs), or in the education services sector where the VAT rate can depend on the exact nature of the training and materials you are providing. 

The other VAT area which often causes problems is where your business has a non-routine transaction, perhaps buying or selling second-hand equipment.  Trickiest of all is where there is property involved, for example buying a new premises or leasing a shop.  VAT on property is an area where even the most compliant of taxpayers can get caught out. 

6          Capital Gains Tax 

Businesses have to pay CGT in the same way as individuals.  For incorporated businesses, CGT is paid via the corporation tax system.  If your business is unincorporated, even though the Capital Gains Tax year is the same as the Income Tax year, it is broken into two periods for payment purposes.  Tax on gains in the first 11 months of the year is paid in December.  Tax on gains in December is paid in January.  The January payment date is easy to forget.  Missing a payment deadline will attract an interest charge. 

7          Directors’ Tax Responsibilities 

Company directors have particular responsibilities under Irish tax law and can be regarded as being self-employed.  Company directors who own shares in their business are subject to the same income tax filing rules as the self-employed.  They must file a return by 31 October each year, even if they have no additional tax liability after PAYE is paid.  If they don’t file, Revenue can increase their tax liability by up to 10%.  (This harsh rule doesn’t apply if the director is only a director of a non-commercial company, for example, the management company of a block of apartments.) 

8          Keep the records straight

Again, this might fall into the blindingly obvious category of things to do, but remember that there is little concept of materiality in tax matters. You might regard your petty cash as petty, but that doesn’t mean the Inspector of Taxes will.  Usually there is no problem reimbursing staff for reasonable expenses or mileage claims particularly if the amounts are within Civil Service norms. However, you have to keep clear books and records as evidence of how much you are paying and why. Businesses more often fail the tax test for how they reimburse, rather than for how much they reimburse.  While always important, these steps are vital if you are running your own small professional services company. 

9          Take particular care with Family Owned Companies 

A shareholding in this type of company can be quite hazardous to your tax health.  There’s a significant block of tax law specially designed to apply penal taxes on funds transferring between the company and its shareholders.  The reason behind this is to deter people from channelling earnings into companies (taxed at 12.5%) instead of accounting for them in their own right (and paying tax, USC and PRSI at anything up to 55%).  Be careful of either lending money into, or borrowing from, the company.  Private use of the company’s assets can also lead to perhaps unexpected tax bills. 

10        Special rules in special cases

Anyone in business in building, meat processing or professional services must be aware of the special rules that apply to their industries.  Those businesses which operate Relevant Contracts Tax (RCT) and Professional Services Withholding Tax (PSWT) will know how easy it is to fall foul of rules which can require tax to be deducted from gross earnings.  Neither RCT nor PSWT are taxes in their own right. Instead they are mechanisms for ensuring tax compliance and enforcement in areas which are seen as high-risk from a tax collection perspective. Think of them as applying on the basis of presumed guilt, so that you can always establish your innocence.  

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland