We did some in-house training yesterday and the focus was on the upcoming Income tax return season. Tax returns are not easy, and our consistent message is not to do your own. We saw an example of this last week when a client whose circumstances had changed said he would do his own return. This wasn’t a problem, so we sent him out all the information from the previous year. When he saw what we sent out he changed his mind straight away and asked us to continue to do it.
For 2020 the Income Tax return is more complex than normal, due to the Covid measures. You will need to tread carefully, especially if you are a Company Director. We will look at some of the key things to be aware of which include
- TWSS/PUP Income
- Debt Warehousing
- Dates & Surcharges
- Preliminary Tax – 2021
Do you file an Income Tax return form 11 every year and received the TWSS in 2020? If you or your spouse got TWSS then you will owe the tax on that. You don’t have the option to spread the payment over 4 years, by reducing tax credits, like PAYE workers. You will pay tax at the lower or higher rate depending on your income. It will also be subject to USC and again the rate depends on your other taxable income. The highest rate you will pay will be 48% being 40% income tax and 8% USC. This income is not liable to PRSI.
The PUP is a payment from the department of social protection akin to a social welfare payment. Some will have received both the TWSS and the PUP. Again, you will pay tax on the PUP through your 2020 Tax return and the rate you pay will depend on your other income. The payment is not liable to USC or PRSI so the highest rate you will pay on it is 40%.
If you are self-employed or an owner-director [own 15% or more of a company] you will get a PAYE credit for this income. You don’t get a PAYE credit for your profits or director’s salary but get the Earned Income Credit. You need to make sure that the combined PAYE and Earned Income credit comes to €1650. That is the most you can get between the two credits. Both the PUP and the TWSS income will be on your prepopulated form 11 which you can download from ROS.
There is about €2.6 billion of tax debt warehoused, mainly for business VAT & PAYE. Are you an owner-director and your company warehoused PAYE in 2020? If so, you will not get a credit for PAYE deducted from your salary and could end up with a chunky tax bill. The reason you won’t get a credit for the PAYE is that it wasn’t paid to Revenue. Let’s look at an example.
Fabio and Mary Buendia own a jewellery wholesale company 50:50. They earn a salary of €60,000 each and both pay PAYE of €13,640. They have no other income. The company availed of debt warehousing for 2020. They didn’t pay the PAYE on their own and employees’ salaries. Their accountant submits their tax return and the assessment issues. It shows that they have a tax liability of €27,280 as they didn’t get a credit for the PAYE deducted. As advisors, we need to be careful about this. The prepopulated tax return will show the PAYE deducted. If the PAYE is warehoused the assessment will show the true position. We will need to engage with our clients to let them know and to see if they can pay the warehoused PAYE debt. This will not affect employees or directors who own less than 15% of the company.
Revenue and the Department of Finance are in talks to try and come up with a solution. Those talks have been going on for a long time now and there is no solution yet.
Dates & Surcharge
The two key dates for 2020 Income Tax returns are the 31st of October and the 17th of November. The extended date applies to those who both pay and file through ROS. If you are not going to be in funds to pay your 2020 Tax liability, then you will need to file your return on or before the 31st. This is to avoid a surcharge [see below]
The extended date is useful as pension payments made before the 17th can be backdated into 2020. The key for this is that they are in the return and that you pay and file on time.
Filing late is not an option especially for company directors. The normal surcharge for being late is 5% of your tax liability if you file within 2 months. If later than 2 months, then the surcharge increases to 10%. Remember that the 2-month period runs from the 31st of October and not the 17th of November. So, the 5% increases to 10% as you are singing Auld Lang Syne! Happy New Year from Revenue. For company directors the surcharge works differently and is more penal. This applies to
- Owner Directors who own more than 15% of the company
- Non owner directors with other income taxed under self-assessment
- A Taxpayer who is jointly assessed and their spouse or civil partner is a director
The reason the surcharge is more penal is that it applies to the tax liability before a deduction for PAYE.
Paschal McGrath runs a successful consulting company, and he owns 50% of it. During 2020 he earned a salary of €200,000 and paid PAYE of €69,604. He has no other income. Paschal was so busy flying here and there that he didn’t submit his return until the end of November 2021. As he filed late, he will be liable to a 5% surcharge. The surcharge is on the tax liability before deduction for PAYE. His tax liability is €69,604 before PAYE. The surcharge of 5% applies to that number, so it is €3,482.
For more information on late returns by Directors go to Part 47-06-03
There is a section on the 2020 return for owner directors that relates to bonuses. Revenue want to see what your earnings were for 2020. You could have got a bonus in 2021 that related to 2020. If so, the bonus should go on the 2020 return together with the tax and USC deducted from that bonus. Likewise, if you received a bonus in 2020 that related to 2019 there are boxes on the return for that. Again, you include the value of the bonus, the tax, and USC deducted.
In most cases no extra tax liabilities should arise. Especially for higher rate taxpayers as the top rates of Income Tax and USC are the same for both years. Yet a tax liability or a tax refund may arise if taxes on the bonus were at different rates than the 2020 other income.
Preliminary Tax – 2021
For self-assessed taxpayers, preliminary tax for 2021 is due at the same time as the balance for 2020. Preliminary tax is a payment on account of your Income Tax liability for the current year. The rule here is that you must pay
- 90% of your current year liability or
- 100% of your previous year’s liability
When advising our clients, we work off the 100% rule in most cases. The reason for this is that we know what the 2020 liability is so we can tell our clients what they must pay. If you don’t pay the correct amount Revenue can charge you interest at a daily rate that equates to 8% per annum. I know that rate is shocking! The interest rate runs from the 1st of November 2021 for this year. For smaller liabilities they don’t tend to collect the interest but if they do you haven’t got a leg to stand on. The reason being is that interest and the rates are in tax legislation, so Revenue are upholding the law.
Are you a company director and have a tax liability because of TWSS or PUP and have no other income? If so, you shouldn’t have to pay preliminary tax for 2021 provided you only have a salary in 2021. If you have PUP or availed of PAYE debt warehousing in 2021 then you should pay preliminary tax based on the rules.
The above is only touching the surface of some of the areas to be careful on. There are many others and ensuring you claim all your credits and allowances is vital too. Your accountant or tax advisor will be best placed to help you complete your return. They are busy people so don’t arrive in with a biscuit tin of receipts on the 16th of November. Invest the time and money getting this right. Otherwise, there are all sorts of beasties waiting to take a bite out of you!
Interested in talking to us? Call Deirdre on 051 396703 or start here. Tell us a bit about you and your business and we will see if we can help.