TaxationTax A levy charged by the government on the income of individuals, business and g+s Is major source of income for the government Government use the income got from tax to finance government expenditure (spending)

The government uses this income for Hospitals Schools Roads Government run services Military

Repayment of loans Promote social equity by

redistributing income and wealth in social welfare exc.

Implications of tax for businesses Reduces profit - more expenditure Cost of production increase Cash glow must be monitor - must be paid on time Administrative cost - collecting, recording and remittance of taxes Can be a disincentive of promotion & motivation for employees, as they pay higher tax rate Effect their choice of location Income tax Main source of revenue for the government Tax charged on a person’s wages/salaries Each time a wage or salary is paid, the employer deducts tax This is then remitted to the Revenue Commissioners The income tax year is January 1st - December 31st

The PAYE system (pay as you earn) Applies to anyone who receives income

from employment Each time a wage or salary is paid, the

employer deducts tax This is then remitted to the Revenue

Commissioners each month The PAYE system requires the completion

of the following tax forms; P12A, P60, P45, P12, P21 (see below)

Features of the PAYE system Progressive - falls heaviest on high income

earners Compulsory Direct - on income Form based Efficient - as employer collects

Employers’ PRSI (pay related social insurance) Levied on firms for every person they employ Are deducted from wage or salary by employer This is then remitted to the Revenue Commissioners Is calculated on gross income Used to provide social welfare benefits, pensions exc

Employees’ PRSI (pay related social insurance) Is a compulsory insurance payment by employees to the state. Calculated as a percentage of gross income

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In the absence of tax credits, emergency tax must be deducted, which is payable at the higher rate of tax. This can be reclaimed at a later date once the proper tax credit has been established

Universal social charge (USC) Is a tax payable on gross income Applies to all tax payers in employment

Self-assessment income tax Paid by self-employed people ie. sole traders Same rate of tax as income tax, however they have to declare the income themselves Often leads to tax evasion

Tax credits Reduces amount of tax payable Is determined by the taxpayer’s personal

circumstances (can change yearly) Eg. Personal, PAYE, incapacitated child,

age, blind, dependent relative tax credit exc Gross tax - Tax credits = tax payable They reduce tax liability calculated on

gross tax Are non-refundable A notice of tax credits will be given to each

employer so they know what to take off

Tax Rates Income tax is taxed at 2 different rates 20% (on tax band of €32,800) 41% on balance of taxable income

Standard rate cut of point Amount of tax paid at the standard rate Any income earned over this gets charged

at the higher rate

Corporation tax Tax on profits Since January 1st 2003 it has been 12.5% in Ireland Low compared to other countries, this attracts foreign businesses, this creates jobs and new g&s Companies must prepare their annual accounts to show profits Business expenses are allowable when calculating taxable profit

VAT (value added tax) Indirect tax - charged on the sale of g+s Regressive - flat rate for everyone All businesses whose annual turnover

exceeds a certain amount must register for VAT with the Revenue Commissioners, a VAT registration number will be received

A VAT invoices shows price including VAT, VAT and price including VAT The trading year is divided into 6 periods of 2 months each, Jan-Feb, Mar-Apr ... The amount of VAT depends on the type of good 0% (necessities) 4.8% (livestock) 9% (tourism industry) 13.5% (electric, coal, oil, gas) Standard rate 23% (normal g&s)

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Tax paid by the recipient on gifts (donor still alive) and inheritance (left in will) Amount payable depends on value and the relationship between the receiver and the donor Single tax rate of 20% Spouses receive gifts and inheritance tax free Gifts of up to €3,000 a year and charitable gifts or inheritance are exempt from this tax

Capital Gains Tax Tax on profits from the sale or disposal of an asset such as property and shares Profit is realised when an asset is sold at a higher price than the original price paid 20% - with an annual exception of €1270 (single person) and €2,540 for married couples Profit made on sale of private residences (up to one acre of land), gains from prize bonds and

lottery winnings and government securities, bonuses on post office or state saving schemes and gains from life assurance are all exempt from this tax

Businesses also pay this tax

Tax deductible - expenses be taken off your tax bill at the end of the tax year eg. interest on loans

Excise duties - tax levied on certain goods within a state. Eg. alcohol, tobacco

DIRT - (deposit interest retention tax) deducted from all interest paid on banks, building societies, Credit Unions, Post Office Savings Bank accounts exc.

Local property tax – is paid by the owners of residential property, paid annually, related to value of the property

Motor tax – is a tax paid annually on all road worthy road vehicles, collected by local authorities

Custom duties - taxes levied on certain goods being imported from outside the EU

Commercial rates – are taxes levied by local authorities on property used for commercial purposes to help finance local government services. In special ‘designated areas’ these may be waved for up to 10 years, to encourage a business environment in rural areas.

Preliminary tax - an estimate of how much taxpayers think they owe during the tax year

Direct tax - tax on income or wealthEg. DIRT, corporation tax

Indirect tax - tax on g+s, paid when spending money Eg. VAT, customs duty, stamp duty

The PAYE system

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Form 12A Completed by any person before go into employment for the first time in Ireland ie. First job in Ireland This must be returned to the local tax office It is used to apply for a certificate of tax credits and standard rate cut off point and to register

for PRSI All following other claims are made on the Form P12 Once the form is completed and returned to the Revenue Commissioners

The taxpayer receives: notice of determination of tax credits and SRCOP The employer receives: certificate of tax credits and SRCOP and, the rate of tax to be

applied this allows them to calculate the correct amount of tax to be paid

In the absence of tax credits, emergency tax must be deducted, which is payable at the higher rate of tax. This can be reclaimed at a later date once the proper tax credit has been established

Form P60 At the end of each tax year each employer gives every employee this form It shows gross pay for the year and, tax and PRSI deductions made during the year Required if the taxpayer is claiming a (tax refund) repayment of tax (if they believe they paid

too much tax) It can be used as proof of income

Form P45 Issued by employer if they leave employment or dies during the tax year Is called a cessation certificate It shows gross pay (up to date of leaving employment) and, tax and PRSI deductions (up to date

of leaving employment) It is then given to new employers so PRSI can be deducted at the correct rate If not going straight into new employment, this form is required for claiming social welfare

benefits or claiming a tax refund

Form P12 Completed at the end of tax year Shows the taxpayers income tax return for the year The tax office can check if the correct amount of tax was paid

Form P21 Called the Balancing Statement Issued by inspector of taxes Compares the tax paid with the amount of tax

which should have been paid If tax was overpaid a tax refund is made If tax was underpaid a tax demand is made

How is take home pay (net income) calculated

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Gross Income X

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PAYE income taxX @ 20% XX @ 41% XGross PAYE tax XLess tax credits XNet PAYE tax payable X

Employer’s PRSI X

USC1% of first X X3% of next X X5% of income over X XTotal USC payable X

Net incomeGross income X- PAYE income tax X- Employee’s PRSI X- Minus USC X- Total deductions XNet income X

What are the similarities and differences between business and household tax?

Similarities DifferencesRegister for tax with the tax office Businesses pay corporation tax, households do

notKeep proper financial records of tax paid and ensure correct amount of tax paid

Different collection systems, PAYE system for households, the Self-Assessment system 'Pay & File' applies to companies

Both are required to pay VAT on g+s There are more tax allowances (ie. credits) available for businesses then households

Can seek legal ways of paying less tax. eg. tax credits

Businesses can claim VAT refunds, households cannot

Must co-operate with the revenue commissioners to ensure correct tax is paid

Businesses act as unpaid tax payers for the government, collecting VAT, PAYE, PRSI, Corporation tax

Must consider timing when paying tax in order to manage cash flowCapable of tax evasion and tax avoidance

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