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Tax Return Season - A Whistle Stop Tour

The cat is missing me a lot. He's not as friendly as he used to be, and he feels all the love and affection he shared with me is a one-way street. I have explained to him that this is a very busy time of year. I must dedicate my time to our clients who pay us money to look after them very well. And that the money they pay us buys nice food and produces that warm glow from that white metal thing you snuggle up to. I get a nonchalant glance and he's off then on tinder to find a more suitable owner. And it's only going to get worse for him. My daughter is bringing over her new kitten "Lil Timmy" for the weekend. I suspect the introductions won't go well and they won't be automatic best buds. I can see it now. Lovecats by The Cure playing in the background as they duke it out!

Over the last two weeks, we explored exiting a business that has a lot of cash assets. Last week was part 2 of a client success story. In case you missed it see here

This week was the end of the latest tax deadline. Income Tax with a sprinkling of Gift/Inheritance Tax returns to keep us on our toes. The deadline was Wednesday the 17th but that got extended on Wednesday morning to today at 5 o clock. We are going to have a brief look at some interesting issues that popped up over the last few weeks

  • What we don't know
  • Pays to be curious
  • Wealthy pay a lot
  • Excuses

What we don't know

Brendan in MK Brazil refers to this as a very dangerous concept of "what we think we know but don't". So, we are 100% sure we know something, but we are 100% wrong. This happened to me twice in the last two weeks, but I only found out the answer yesterday. The day after the original deadline. Usually, we don't do many Capital Acquisitions Tax [CAT] returns. These are gift/inheritance tax returns. Often, they are the remit of solicitors. We either register the client for CAT or link us for that tax. We set up a Ros Debit Instruction [RDI] to pay the tax for both. We completed the form on ROS offline and upload that to Revenue and go to process the payment. But the screen tells us the only option is to pay by card. After a few screams of WTF and throwing clumps of hair to the ground, we take a breath and have a quieter moment. How could this be? We have set up an RDI and we can see that is set up right. This is not working the way it should be. We stay calm and send a pleading mail to Revenue, via My Enquiries, asking for their help. And there it is yesterday the answer in a nice Revenue document about paying your taxes. If you file an offline IT38 you can't pay by RDI. You can only do this is you complete a return online. I scream at the laptop that makes no sense. We can do this for Income Tax, and we have done it thousands of times, but we can't do it for CAT. I am thinking here are my two clients going to get a surcharge because they haven't paid and filed online? We have filed but not paid because the system doesn't allow us. In one case a 5% surcharge would be €11k. If there is you will see me chained to the Dail gates next week with a placard emphasising the injustice of it all.

Pays to be Curious

Three notable examples come to mind.

  • Home carer Credit & losses
  • Joint assessment/Separate Assessment
  • Business Property Relief claim

Jimmy Dunne has a small business selling secondhand motorbikes. He makes a loss in 2020 of €8000. He also works part-time in a garage and earned €10000 in 2020. His wife Marie has a great job, and they have one daughter Mary. On the face of it, he has no profit from the business and employment income of €10000. But he can offset the loss from the business against the employment income. By doing this his income reduces to €2000. The Home carer credit now comes into play. Marie uses the full lower rate band of €44300 for a married couple. So, they can either

  • claim the home carer credit of €1600 or
  • increase the lower rate band by the amount of Jimmy's income up to €26300

If they don't increase the lower rate band Jimmy pays tax at 40%. If they do increase, he pays at 20%

€2000@20%€400
Home carers Credit€1600
Tax saving€1200


Liam Nolan runs his own company and does his own tax return every year as he has two rental properties. He and his wife Nuala file separate tax returns. They never made a form request to Revenue for separate assessment. He wants us to look over the return to see if everything is ok and we ask some questions about Nuala's income. She works part-time and has an annual salary of €12000. She has a personal tax credit and a PAYE tax credit. Yet when we look at her income for 2020, she has paid tax. She also has a lower rate band of €35,300 being half the married rate band. Liam's tax liability under separate assessment is €13700. When we combine the two incomes the combined tax liability is €9700. This arose from a few reasons

  • Liam can get an extra lower rate band of €9000 that Nuala didn't use. His lower rate band goes from €35300 to €44300. This is a tax saving of €1800
  • Liam can use the tax credits that Nuala doesn't use. To pay no tax Nuala needs credits of €2400 but she has credits of €3300. This is a saving of €900
  • He also gets credit for the tax that Nuala paid. Oddly, she has paid tax so must have been on emergency tax that didn't get sorted out

So, Liam is very happy and that is even before we go exploring the tax years before 2020.

We won't get into too much detail about the Business Property relief claim. We will explore this further in a future blog. On the first draft of an inheritance tax calculation, our client's liability was €242000. That is before we explored further and went digging. Her final liability was €221000. She was a very happy lady at 6 o clock on Wednesday evening when she knew she was going to pay €21000 less.

It’s very unlikely that someone doing their own tax returns would pick these things up. It's super to know that we have a very curious team in here that will go exploring these issues for clients.

The wealthy pay a lot

We see a lot of large tax bills in 2020. One thing that strikes me is that the wealthy pay a lot. I am not political at all but do take an interest when it comes to finances and taxes. One obvious example of this is our medical professionals. Not only are they keeping us healthy, but they are working like savages doing it. Their top tax rate is not 52% but 55%. The self-employed that earn more than €100000 pay USC at 11%. So, Income Tax at 40%, PRSI at 4% and USC up to 11% is a very large chunk of their profits. Examples of this are

  1. Client with profits of €339000 has a tax liability of €162597 [effective tax rate of 48%]
  2. Client with profits and income of €265000 has a tax liability of €116958 [effective rate of 44%]

This was particularly evident in the tax payments from one household. The husband is very exceptional at his profession and paid €344000 in Income Tax. His wife will pay inheritance tax of €221000 now. She will also pay circa €60000 in CGT by the middle of December. That is €625000 in the space of a month going into the exchequer. Remember Inheritance Tax and Capital Gains Tax are at 33%. The used to be at 20%. If we increase taxes, we run the risk of losing a lot of people. They'll all be apartment hunting down the road from Johnny Ronan in Malta!

Excuses

As a running buddy of mine says "excuses are like elbows we all have them". Our team and especially our office manager Dee are coaxing, cajoling, and even begging. And why is that? It is to get accounts, returns, B1 pages, and whatever else we need so that you don't miss deadlines. Any we are bloody good at not missing deadlines. Of the 105 tax returns that we did, 103 went in on time. Two were outside our control as they never gave us the information even after all the pleading. We've had the usual list of

  • the dog ate my homework
  • I can't find my file
  • A friend of mine had Covid in 2020
  • I thought we had until the end of the year
  • What year are we doing again - and that's after reviewing and signing the return!
  • Oh I don’t look at that e-mail account much

And we are getting some very poor-quality pics from clients, most notably of B1 pages. Some very far away, some way too close, and some taken with a very shaky hand. At least we have a couple of photographers on our books so we can hitch them up.

Summary

Another tax season is over, and I suspect it will be a huge tax take for Revenue. Credit to our brilliant team here who have put their shoulders to the wheel. This is to protect clients and ensure they pay what they must pay and no more. That doesn't mean we are sitting back and relaxing now waiting for the run into Christmas. Far from it. We will be busy working, training, improving, and thinking of ways to do things better to help our clients. We want them to grow and succeed and that's what drives us on to be more curious.

Interested in talking to us. Call Deirdre on 051 396703 or contact us. Tell us a bit about you and we will see if we can help.



 

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