Hello from CF
We have the All-Ireland hurling final on Sunday which is very strange and very exciting for Galway and especially Limerick. It’s super to see houses being done up and green and white on car mirrors. We now know the neighbours and friends that have the Limerick connection so the very best of luck to them in the final. A couple of cases came into us in the last few weeks that result in the subject of this weeks “You ask we answer” blog.
Two Income Tax clients unfortunately got letters from Revenue looking for interest on late payments of Income Tax for 2016 on the basis that they hadn’t met the Income Tax payment requirements for that year. In the first case the interest charged was €2780 [see letter] and in the second case it was €5785. When you consider the large amounts of Income Tax that each of these clients paid, to be charged this amount of interest on top of what they have already paid is very disappointing. Both are extremely compliant taxpayers, have no outstanding debts with Revenue and are making very large contributions to the local economy through the creation of employment which leads to the payment of other taxes such as Vat & PAYE. See below for more ranting!
Why were we charged
The reason both were charged is that they failed to meet their preliminary tax requirements as per Revenue rules. Preliminary tax is basically a set minimum amount of Income Tax that you are obliged to pay by a set date. The rules are quite straightforward. You have to pay;
- 90% of the current tax year’s liability
- 100% of the previous tax year’s liability
- 105% of the pre-preceding year’s liability [if paying by direct debit]
Let’s look at an example. Jose Woodward, football agent, has an Income Tax liability for 2016 of €25,000 and for 2017 his liability is €32,000. He prepares his accounts each year to 31 December. In order to meet his preliminary tax obligations for 2018 he would have to base his payment on the rules of the last two points above so he would either pay;
- €32,000 hence meeting the 100% of his 2017, being the previous year’s liability or
- €26,250, meeting 105% of the 2016 liability, if he pays by direct debit
The date this has to be paid by is the 31st October 2018 or by the 14th November 2018, if paying and filing on-line through ROS.
Could Jose be charged Interest for 2018
The answer is yes if he fails to pay the required amount by the set date. Let’s assume he has a lot of money tied up in October trying to engineer a move for his start player Paul so he only pays €15,000 preliminary tax on the 31st October 2018. In 2019 he has successfully moved Paul along and is in funds again. His beleaguered tax adviser, Romelu, has calculated his 2018 tax liability at €50,000. As Jose has already paid €15,000 for 2018 he owes €35,000 and he pays this at the end of July 2019. Feeling very special after clearing his 2018 liability in full with Revenue he’s in foul humour one month later when he gets a letter in from Revenue to confirm that he owes them interest for 2018. He calls Romelu and is very unhappy about the situation. Romelu is unaware as he didn’t get the letter from Revenue as the tax agent.
What is the interest charged
Interest is charged at a daily rate of .0219% which is just short of an annual rate of 8%. This really shocks Jose considering his German friend Jurgen is only paying 3% in the UK. The rate is applied from the due date for the preliminary tax payment which is the 31st October 2018 and interest is charged on the full tax liability, less the amount paid, to the actual payment date. So the period in Jose’s case is from 31 October 2018 to 31 July 2019 which is a total of 274 days and results in an interest charge of 6%. Therefore the rate of 6% is applied to €35,000 which comes to €2,100. Jose is not happy so neither is Romelu. Jose is given 14 days to pay and Romelu appeals to the tax office but gets nowhere and is told that if he doesn’t pay within the required time limits then the debt will be sent to collection agents which could incur more cost.
I am not one to be giving out, to be pessimistic and negative about most things but to be honest this is really bugging the life out of me. Well is that?
- Interest is being charged on the full tax liability and not on the preliminary tax amount
- The rate of interest is just crazy. It is way too high. About 266% higher than in the UK
- Trying to get tax refunds from Revenue for our clients, especially for larger amounts, is proving more difficult and time consuming. It is taking us up to 6 months and longer in some cases to get money back and this is after numerous calls and correspondence and sometimes these can lead to Revenue enquiries where they look for additional information. This creates a serious cash flow difficulty for our clients, takes up our time and can add more cost to our clients. Yet Revenue are looking for immediate payment of interest or else!
- Revenue are not paying interest out on taxes overpaid, except in very limited circumstances, and the rate is for overpayments is about 4% so half the rate they charge for underpayments. It’s been a long time since we saw a client getting a payment of interest from Revenue.
- From what we see it looks like the interest is being applied to the middle to higher income earning taxpayer who has a very good compliance history and has no outstanding tax liabilities. It looks like there is an income cut-off point so those with an ability to pay will be chased.
- Tax agents are not getting the interest letter. Why would this be? Well we might kick up a fuss and complain or challenge the calculation which creates hassle and delay for Revenue.
With the upturn in the economy there has obviously been a change of strategy from Revenue in that they are becoming more hard line and less sympathetic, so the advice is to meet your preliminary tax obligations if you are in funds to do so. If you are not in funds consider a short-term borrowing once the rate of interest charged is less than 8%.
As always make sure you speak to your accountant, so you have this covered, or one of the team here at Comerford Foley would be more than delighted to have a chat with you.