That is the question. Are you ready to invest in your bookkeeping?
It depends on how you view it. Do you see it as something that is a necessary evil that has little value for you? Or do you think it is a vital part of your business that can help you grow and achieve your business goals?
We will introduce you to the O’Donnell Brothers.
- Donal O’Donnell and his company House of Yards Ltd
- Gary O’Donnell and his company Erections Ltd
Both are in the construction trade. Donal’s company builds yards, driveways, and pavements. Gary’s company puts up timber framed housing. They have similar sized businesses, with a turnover of €1 million, and have 5 employees each.
Donal – House of Yards
Donal gets his nephew Pat to look after his bookkeeping. Pat is a lovely lad and Donal would like to give him a few bob to help him out. Pat loves his Gaelic Football and is prone to go on the beer for a few days after a club match. The books for House of Yards fall behind. The current position is
- Bimonthly Vat returns for the last 3 periods are not filed
- No Tax clearance
- RCT rate is 20%
- The books didn’t go to the accountant yet to finalise the 2021 accounts
- The company provides Donal with a Land Rover Discovery
- The dog ate Pat’s homework!
Gary – Erections Ltd
Gary gets the Comerford Foley team to look after his bookkeeping. His position is the polar opposite in that
- Vat returns are all up to date
- Tax clearance is in place
- The RCT rate is 0%
- Gary signed off the 2021 accounts in March
- He has a Land Rover Discovery too
- The CF bookkeeping team had his homework for breakfast!
Vat returns on time
Both operate in the construction industry and are subcontractors to principal contractors. As such they are under the Reverse Charge system for Vat. They don’t charge Vat to the Principal Contractor but can reclaim Vat on their costs. So, both are in a Vat repayment position.
Let’s assume they spend €400,000 on materials. The Vat element of that, at 23%, is close to €75,000. If Donal’s Vat returns are behind by 6 months, then he has €37500 sitting with Revenue. And that’s on materials alone. Revenue will issue the refund to Gary’s company, so it is sitting in the bank.
House of Yards doesn’t have tax clearance. Revenue will hold onto tax refunds until the taxes are up to date. Erections Ltd has tax clearance so gets all refunds when they fall due.
Donal nabs Pat after a football match and has a quiet word in his ear about the Vat. Pat agrees to sort out the return for Jan/Feb 2022. He files this and is very happy telling Donal that a refund of €16000 will be due very soon. Two days later Donal is fuming as he gets a letter from Revenue saying that they are not paying. They will pay it when the company files the Vat returns for March/April and May/June. After some crying and hair pulling Donal gives Pat a less gentle call.
Pat vows to get his act together but he’s afraid to mention the Revenue enquiry letter to Donal. He’ll tell him when the other fella calms down a bit.
Relevant Contracts Tax
Those of you in construction will be very familiar with RCT. House of Yards is doing the driveways and paths around a large housing estate in Co. Donegal. The principal contractor, Gary Brooks Ltd [GBL], owes HOY €100,000. Before making the payment GBL must inform Revenue that it is going to pay HOY the €100k. Revenue will then confirm the RCT rate to use. As it is 20% GBL pays €20,000 to Revenue and €80,000 to HOY
The €20,000 that GBL pays to Revenue sits as a credit owing to HOY. HOY can use that to pay other taxes like PAYE.
Erections Ltd put up the frames in the same housing estate and is also owed €100,000 from GBL. They notify Revenue of the payment and Revenue confirm the RCT rate is 0%. GBL pays the full €100,000 to EL.
Accounts on Time
What is the downside for Donal of not having his accounts in on time? The main negatives are
- He needs accounts to pay his Corporation Tax [CT]. If the CT return is late, then there is a 5% or 10% surcharge. Paying Revenue more than you should!
- A company you must file accounts with the CRO. Failure to do that on time will result in a fine and loss of audit exemption. Painful and costly
- Not knowing what he owes until the last minute. Is there enough in the company bank account to pay? If not, at least he has some RCT money with Revenue. If HOY didn’t pay enough preliminary CT, there could be interest too
Let’s contrast that with Gary’s position and look at the advantages for him. Remember he signed off his accounts in March and in that meeting with CF we went through
- His Corporation Tax liability for 2021 and preliminary CT for 2022
- Bonus or Dividend. Gary opted to take a bonus of €40,000 for 2021 and that would go through the 2021 accounts. It would reduce the 2021 CT liability and Gary would get the net bonus after Tax. Gary would get €20k net and the company would save €5000 in CT for 2021. And reduce the preliminary CT payment for 2022 by €5000
Gary was going to pay off some expensive personal debt and go on a luxury cruise with the balance.
Land Rover Discovery
What a beautiful machine and a treat for both. They have 5 doors and great boot space, so handy to carry the tools. Their companies bought them in 2018 for €100,000 each. Donal asked Pat to investigate the BIK issue to see what tax rate would apply. Pat confirmed that it would be 5% if it was a van and 30% if it was a car. As Donal used it for his tools and to bring some of his lads to work, he opted for the lower rate.
CF advised Gary that the correct BIK rate was 30% as, per Revenue Guidance, it is a car and not a van. Gary paid the correct BIK taxes on it but was able to reduce the cost as he had high business mileage. Donal’s company faces a PAYE liability of €100k, plus Interest & penalties.
|€100,000 X 25% [30% – 5%]||€25,000|
|Number of years||4|
You can see that both have a different way of doing things. Donal doesn’t value his bookkeeping function whereas Gary does and invests in it. Gary has
- Cash in the bank and all taxes paid and returns on time
- Bonus cash to pay personal debt and go on a cruise
- Accounts done and all CRO obligations met
- A solid bookkeeping system in place to help him grow his business
And Donal has
- Cashflow issues – Revenue have Vat and RCT belonging to his company as doesn’t have tax clearance
- Accounts not signed off and uncertainty over what CT is owing
- A large Tax debt hanging over the company with the BIK issue
- Another Revenue letter that he doesn’t know about yet
Imagine you are a bank or an investor. It is obvious which company you would put your money in.
Gary sees the link between the business and the personal. If the company is strong and profitable it will give him all the funds he needs to look after his family. It will create wealth for him. Donal O’Donnell, known affectionately as DODO, has stress levels through the roof. He is always chasing money and is right up to his overdraft limit. And that’s the stuff he knows about. All is not lost for him. He can change his ways and invest in his bookkeeping. Or not, and like the bird, become extinct.
Are you a bit like Donal but want to be more like Gary and invest in your business? If you want a team to support you, Start here