There are only two certainties in life and those are death and taxes! From individuals to companies there is potentially a lot to be gained from good tax planning. Mannion Lochrin & Co. are here to assist clients ensure that they are aware of the various tax codes which are applicable to them and to help put their affairs in order.

How the tax system works for individuals

This section deals with self-employed people as opposed to employees. If you are an employee and this is your sole source of income then your employer is responsible for the calculation and deduction of tax from your pay so you are left with only your after tax income. (Note if you have multiple sources of income, e.g. a salary AND farming income or investment income or rental income etc., then you are responsible to make a tax return so read on).

Tax is payable on income. Income does not equal turnover but is more akin to profit. So you first need to establish your assessable income or profit. To arrive at your profit you need to subtract from your turnover the deductible business expenses. Allowable business expenses can be best described as expenditure wholly, exclusively and necessarily incurred in relation to the running of your business. So if you were a shopkeeper this would mean sales less purchases of goods for resale, electricity, insurance, rent, wages for staff, etc. If you run a B&B it would be your turnover less the insurance, heating for the house, breakfast costs, laundry costs, cleaning, maintenance and so on. Remember if you also live in the house then the Revenue Commissioners are unlikely to allow you to write off the entire oil bill against the B&B income as a portion of it clearly is for personal use!

Once you have calculated your income then you are allowed to deduct a certain portion of capital expenditure such as fixtures and fittings and computer equipment each year. These deductions are known as capital allowances and the Revenue Commissioners have rules as to how much you are allowed but as a rule of thumb you could calculate it as 12.5% of the cost each year until the asset is all written off. For a rental property the capital expenditure would be beds, sofas, table & chairs etc. As with all write offs or deductions from your income they must relate to expenditure directly required in the operation of your business.

Now you have estimated your taxable income what tax is payable. Well, there are two kinds of tax payable, namely income tax and social insurance (PRSI). Income tax is calculated at 20% on your first €29,400 income with any extra income over €29,400 taxable at 42%. If you are a married couple working together then you may be entitled to have the €29,400 limit doubled to €58,800. So you can see that a lot of people will only have to pay income tax at 20% which is a lot lower than in 1984 when a married couple found themselves paying a marginal rate of tax of 65% after only around €28,000!
PRSI is more straightforward for self employed persons in that it is 3% on income if it is less than €18,512 or at 5% on income over that subject to an annual minimum of €253.00 for the tax year.

Individual Tax Credits

There are changes introduced in the budget each year which impact on the tax position of individuals. Some of the relief’s & benefits which are often overlooked in dealing with a persons tax affairs are the following:

Deduction for refuse charges
You can claim for your domestic refuse collection against your income tax. This is granted a year in arrears and is allowable at the standard rate of tax.
Deduction for medical expenses
Medical expenses (non reimbursed by VHI/BUPA) are allowed as a deduction against your top rate of tax after the first €150 for an individual or €250 for a family
Trade union subscriptions
If you are a member of a trade union these subscriptions are allowable against your income tax.
Tax relief at source for Mortgages
In order to ensure you are getting this relief (which is paid by the revenue to your bank to reduce your mortgage) you need to apply for it. This is important particularly if you have moved home or taken out a new mortgage you may be entitled to a greater credit.
Relief’s for dependant relatives or incapacitated children
You are entitled to increased tax credits if you are caring for a dependant relative or incapacitated child.
Certain third level fees deduction
Fees paid to certain third level colleges are deductible against your income tax also.
Age tax credit
Are you 65 or over? Does the revenue know? If you have reached 65 then you are entitled to an increased tax credit but don’t necessarily assume the revenue knows this. You may need to claim the relief
Charitable donations
Depending on your status you may be able to get tax relief for charitable donations you have made (over €250) or you may be able to get the revenue to top up your donation by up to 42%.

The above list is not exhaustive but does indicate the kinds of issues often overlooked by people that can affect the amount of tax they should pay each year.

Revenue Audits & Special Investigations

You will have seen in the national papers the quarterly publication of tax settlement cases which the revenue have made with tax defaulters. Scarcely a publication goes by without a number of cases from people in Connemara so we can see that the Revenue net is cast far and wide and tax cases aren’t just the preserve of wealthy Dublin property dealers or politicians. So how does the revenue system work and how do they single out specific cases amongst the tens of thousand businesses and millions of taxpayers that are in the country. What we have seen in recent years is a two pronged assault on tax defaulters.

The first and most prominent cases are those arising from special investigations like Ansbacher, bogus non-resident account holders, NIB/Clerical Medical cases etc. In these cases the revenue have obtained lists (from the banks primarily) of the people involved and they simply go through each case and identify where the money originally came from. If there is no satisfactory explanation as to the source of the original investments in these schemes Revenue prosecutes the individual on the basis that this income was never declared for tax and they end up paying tax, interest and penalties on the entire investments. Often the final tax settlement is a multiple of the original investment so these cases are particularly painful for the individual involved.

The second kind of case is the cases involving a revenue audit where an individual case is singled out for specific investigation by the taxman. So how does the revenue select specific cases for audit? Current figures suggest around 5% are selected at random, so we can see therefore 95% of cases are triggered by something other than fate. So you can assume if you are selected for audit it is because either there is something in your return that is out of norm or there is some third party information which the revenue have which suggests the returns are not in order.

The Revenue draw on a number of sources of information when selecting clients for audit, in fact at a recent tax conference Revenue explained that they are developing a system whereby a computer programme can help them identify potential tax cases where they should take a closer look.

One of the many parameters this system uses is the timeliness of returns. The inference here is that late returns can make you more susceptible for tax audit so this is one area where a taxpayer can certainly tidy up their affairs and ensure that they are less likely to be selected. Another area where the revenue can select a taxpayer is on the cross checking of other information available to them. An obvious example of this is where a person runs a business, advertises the business etc. but doesn’t make a tax return for the business. It is easy to see if these two pieces of information came to the attention of the revenue what action is likely to ensue.