Introduction   

With the Irish “Summer” rapidly coming to an end the thoughts of many self employed taxpayers will begin to focus on their income tax obligations for the current year. There is little doubt that the annual tax filing deadline is a source of much anxiety to many taxpayers.

However, a mixture of advance planning and seeking expert and experienced advice from suitably qualified Accountants and tax practitioners can as Alan Lawlor now explains go a long way towards mitigating the pain involved and eliminating last minute surprises.

The basics revisited

Every self employed taxpayer, most company Directors and indeed employed individuals with other sources of income are obliged to file their 2009 Income Tax Return with Revenue by 31 October 2010. This filing deadline is extended to 16 November where Returns are filed on line through the Revenues ROS system.

In addition to filing their Returns by that date this is also the date on which the following liabilities must be paid to Revenue:

(i) The balance of any tax liability arising for 2009.

(ii) An amount of preliminary income tax for the year 2010 which is at least equal to the lower of

• 100% of the final liability for 2009, or, 
• 90% of the final liability for the current year.

Clearly this can give rise to significant cash flow pressures for many individuals which may not be as easily assuaged by working capital or other short term finance extended by financial institutions as it was in the past.

It is absolutely imperative that steps are taken at the earliest possible stage to finalise figures for 2009 so that taxpayers can identify their estimated liabilities at the earliest possible stage.

Some tips and traps

- Tip No 1 - pension planning

An additional pension contribution may be made on a tax effective basis before the filing deadline allowing a taxpayer claim the tax relief arising against their 2009 income tax liabilities. The maximum tax effective contribution ranges from 15% of net relevant earnings for persons under 30 years of age to 40% of earnings for persons aged  60 or over. This is subject to an overall deemed earnings cap of €150,000 in 2009.

It is important to remember that a decision on a pension investment is first and foremost an economic decision for the taxpayer concerned.

- Tip No 2 – other investments 

There are relatively few “all of income” tax shelters now remaining. Examples of schemes which are still available are Film investment and business investment (BES)  schemes.  A significant cash flow advantage of many Film schemes is that the promoters will usually facilitate financing of most if not all of the required investment.

It should be noted that a 2009 BES or Film scheme investment can not be used to reduce a taxpayers 2010 preliminary tax liability using the 100% rule outlined above.
 
- Tip No 3 – Maximise tax credits and 20% standard rate band

A number of brief points under this heading:

- Where both spouses are in receipt of income the maximum amount that can be earned between them before paying tax at the 41% tax rate is €72,800 per annum. This should be contrasted to an amount of just €45,400 per annum if just one spouse is in receipt of income. An early review of a taxpayers affairs  can perhaps give rise to planning opportunities to ensure maximum efficiency in this area.

- PAYE tax credit – This is not due to self employed taxpayers per se BUT is available where a taxpayer is in receipt of social welfare income.

- Other credits and reliefs ranging from an aged credit for over 65’s to relief for service charges, medical expenses and carer allowances should always be looked at in good time in advance of the filing deadline.

Note in particular that taxpayers are entitled to make a back year claim for up to 4 years for  reliefs due but not claimed.

Tax trap No 1- The high earners restriction 

In simple terms this ensures that taxpayers  earning over €250,000 in 2009 or €125,000 in 2010 may be restricted in the use of tax reliefs to ensure that they pay an effective minimum rate of tax in any one year. This minimum rate was 20% in 2009 and preceding years but increases to 30% in 2010.

Great care is required in addressing the practical implications arising from this restriction in any individuals specific circumstances as it will in some cases contradict the rules otherwise applying to certain reliefs.

Tax trap No 2 – The Income levy !

The April 2010 budget effectively doubled the rates at which levies were imposed on earnings arising from May 2009 onwards. Non PAYE taxpayers may be aware that overall “composite” rates apply on an annualised basis, but many PAYE taxpayers will not aware that this also applies to them.

Where PAYE source income arising to a taxpayer has been skewed towards the early part of 2009 this may well lead to an additional overall and probably unexpected tax liability arising on filing of a 2009 Return.     
   
Conclusion

Tax is a real cost to all business owners but with early planning and expert advice real savings can be achieved. This will allow entrepreneurs the time and piece of mind to concentrate on the real job of growing their business and increasing their own wealth in this most difficult environment.

For more information please call Alan Lawlor on 01 8880830 or alan.lawlor@wallaceodonoghue.ie