Taxation RoI Key Learning Outcome The key objective of this module - - PDF document

27/09/2020 1

Virtual lecture 1

27 Sept. 2020

Taxation RoI

Key Learning Outcome The key objective of this module is to provide learners with knowledge and technical skills concerning the tax implications of personal and business transactions.

Taxation RoI contact hours

Hours (60) Orientation College 1 Virtual lectures ATI 18 6 x 3 hrs Virtual tutorials College 39 26 x 1.5 hrs Software demo ATI 1 Mock exam feedback College 1

Week 1: Irish taxation system. Overview of collection system Week 2: Classification of income. ROS Week 3: Introduction to income tax computations Week 4: Overview of tax bands and tax credits Week 5: Reading week

syllabus

Administration & procedures 20% Personal Taxation 40% Payroll 20% Value added tax 20%

Course material

Textbook 20/21 Lecture notes Weekly tutorial material Tax reference material (TRM) MyRevision Practice questions & solutions Sample/past papers

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27/09/2020 2 Taxation exam

The Paper consists of six questions which will examine all key syllabus elements to ensure that learning outcomes are achieved Section A - three compulsory questions Section B - three questions - answer two All questions carry equal marks

Examination topics

Payroll Income Tax computation Self-employed computation VAT General/Theory Multi-choice

20/21 exam

Examiner liaison day Exam location Format: book, input

Week 1 -Irish taxation system

Definition of taxation

• A tax is a compulsory financial charge, or some other type of

levy imposed on an individual or legal entity by a governmental organisation in order to fund government and

• ther public expenditure.
• Failure to pay, along with evasion of or resistance to taxation,

is usually punishable by law.

Origins of tax 7 8 9 10 11 12

27/09/2020 3 Tax Law

Taxes consolidation act 1997 VAT consolidation act Case law Our course and exam based on 2020 tax legislation

Types of tax

Direct taxation Income tax Corporation tax Capital gains tax Capital acquisitions tax Indirect taxation Value Added tax (VAT) Stamp duty Customs duty Excise duties

Week 1 - Tax collection system

Revenue commissioners

Mandate/work Statute/Government European Union Assessing and collecting taxes and duties Administering the customs regime Co-operation with other state agencies Agency work for other departments Collection of PRSI for DSP Provision of policy advice

Office of the Revenue Commissioners

16 divisions Regional divisions Large cases division Collector General Tax appeals commission (TAC) Self-assessment

Applies to the income of chargeable persons. The taxpayer makes direct payments to the Collector General.

Tax collection system

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27/09/2020 4 Tax collection system

Pay as You Earn (PAYE) is deducted at source from all income earned from employment. The employer has a responsibility to calculate and deduct the correct amount of Income Tax, PRSI and Universal Social Charge from an employee’s earnings and pay this amount over to the Revenue Commissioners each month. If an employee has no other sources of income, all their tax will be collected and paid through this system.

Tax collection system

Withholding taxes

These are amounts of tax deducted from a payment at source by the person making the payment and are generally deducted at a flat rate. Where they are deducted, they are normally available as a tax credit for the individual receiving the payment against his total Income Tax liability for the year. Examples are: Deposit interest retention tax (DIRT) Relevant contracts tac (RCT) Professional services withholding tax (PSWT) Dividend withholding tax (DWT)

Chargeable persons include

• All self-employed individuals.
• Individuals receiving income from sources where some or all of the tax cannot be collected

through the PAYE system, for example; – Profits from rents (schedule D case V) – Investment income (schedule D case III, case IV/Schedule F) – Foreign income and foreign pensions – Maintenance payments made to separated spouses / civil partners – Fees and other income not subject to the PAYE system

• All Proprietary Directors (15%)

Self-assessment ‘Pay & File’

Chargeable persons fall within the ‘Pay & File’ system, which means that they have a number

• f tax obligations each year:

– File an Income Tax return for the previous year of assessment, – Self-assess, i.e. calculate their Income Tax liability, – Make the following tax payments

• 1. Preliminary Income Tax for the current year of assessment.
• 2. Balance of Income Tax for the previous year of assessment.

The chargeable person must meet these obligations without being requested by the Revenue Commissioners to do so. Penalties can be charged by the Revenue Commissioners if the chargeable person fails to do so. The system is therefore referred to as a ‘self-assessment’ system.

Preliminary tax

Preliminary tax is an advance payment of the Income Tax liability for the current tax year. The taxpayer is obliged to calculate an estimate of his tax liability for the current year and pay that amount to the Collector General before 31 October of that year. Options available to an individual to choose from when deciding how much to pay: 1. 90% of the final (self-assessed) Income Tax liability for the current year. 2. 100% of the (self-assessed) tax liability for the previous year. 3. 105% of the (self-assessed) tax liability for the pre-preceding year (if paying by direct debit). The taxpayer may choose the lowest payment calculated using the three options.

Week 2 – classification of income

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27/09/2020 5 Tax year

The income tax year is the same as the calendar year: 1st January to 31st December

Main classifications

For taxation purposes income is separated by source Categorised first into schedules Then subdivided into cases

SCHEDULE CASE SOURCE OF INCOME Schedule D Case I Income from a trade (e.g. a self-employed carpenter) Schedule D Case II Income from a profession (e.g. a self-employed solicitor) Schedule D Case III Investment income not subject to tax at source Foreign income – foreign employments, foreign rental income and foreign investment income Schedule D Case IV Irish deposit interest subject to DIRT Covenant income received Other miscellaneous income (e.g. proceeds from illegal activities) Schedule D Case V Irish rental income Schedule E n/a Irish employments, pensions and directors’ fees Schedule F n/a Dividends from Irish resident companies

Exempt income

Certain income is exempt for Income Tax. The following exceptions are the most common:

Social Welfare Child Benefit Payments Statutory Redundancy Payments Lottery and Betting winnings Life Assurance Proceeds Interest paid on An Post Saving Certificates and Instalment Saving Scheme Qualifying Artists Income up to a certain limit Income from Qualifying Childcare services up to €15,000 per annum Certain rental income up to €14,000 per annum

Week 2 – Revenue Online Services (ROS)

ROS

ROS includes facilities to:

• File returns online
• Make payments by laser card, debit instruction or by online banking for Income Tax
• Obtain online details of personal/clients Revenue accounts
• Calculate tax liability
• Conduct business electronically
• Claim repayments

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27/09/2020 6 ROS

Payment methods available to taxpayers using ROS:

• ROS Debit Instruction (RDI)
• Laser / Debit / Credit card
• Online Banking

.

ROS

Advantages of Electronic Filing for Customers Avoidance of duplication of effort and substantially reduced compliance costs Reduction in paper handling, photocopying and compliance costs More effective and efficient use of time More accurate processing of returns Access to your own Revenue account from your own PC 24-hour, 365-day access to Revenue Calculation facilities to assist customers Instant acknowledgement of returns Faster processing of returns and payments Speedier repayments

Week 3 – IT computations

Income tax computation

A. Income All income, including exempt income, should be shown gross in this section. Also included will be any allowances and other tax reliefs which can be deducted gross from income. B. Calculation of Total Tax 20% standard rate, 40% higher rate and 33% for DIRT. C. Non-refundable Tax Credits Most of these are listed on page 141 of the TRM (Tax Reference Material). D. Recoverable Tax Credits Usually amounts of tax already deducted E. Tax Payable (Repayable) B minus C & D The computation will consist of the following sections:

Calculation of Total Tax

There are currently two rates of Income Tax that apply, 20% is the standard rate of tax and 40% is the higher rate of tax. The amount of income taxed at the standard rate is determined by an individual’s tax band (also known as the standard rate cut off point).

Personal tax computations

Full Pro-forma Textbook pages 18 - 19

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Week 4 – Tax bands

Single / Widowed (without dependent children) €35,300 @ 20% Balance @ 40% Single Parent (primary carer) €39,300 @ 20% Balance @ 40% Married Couples / Civil Partners (one income) €44,300 @ 20% Balance @ 40% Married Couples / Civil Partners (two incomes) €70,600 @ 20% Balance @ 40%

Tax bands

Deposit interest retention tax (DIRT)

Deposit Interest Retention Tax (DIRT) was introduced in 1986 and provided that certain ‘deposit takers’ were obliged to deduct tax from interest earned by deposit holders on

• deposits. The current rate is 33%.

Show GROSS amount in total income Tax at 33% Allow as tax credit

• Married couples tax bands
• One spouse with income: €44,300
• Both with income: €44,300 + income of 2nd spouse
• Max increase €26,300 (combined €70,600)

Income spouse 1 Income spouse 2 Total income Cut-off point €45,000 €15,000 €60,000 €59,300 €44,300 + €15,000 €45,000 €27,000 €72,000 €70,600 €44,300 + €26,300 €60,000 €12,000 €72,000 €56,300 €44,300 + €12,000 €40,000 €3,000 €43,000 €43,000 €40,000 + €3,000

Married couples

Note: The phrase ‘Married couples’ throughout these lectures incorporates civil partnerships. The tax provisions that apply to married couples are also available to civil partnerships.

Assessment options: Single assessment Joint assessment Separate assessment

Week 4 – Tax credits

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27/09/2020 8 Tax credits

Tax credits are amounts that an individual can deduct from total tax. Non-refundable tax credits may be claimed by an individual based on personal

• circumstances. These credits cannot give rise to a tax refund payable to the individual.

Refundable tax credits represent amounts of tax actually paid by (or on behalf) of an individual. Unlike non-refundable tax credits, when refundable tax credits exceed the total tax, a refund is due to the individual. The most common example of a refundable tax credit is PAYE deducted by an employer from an individual’s employment income (salary / wages).

Tax credits

Common non-refundable tax credits

Single person/Married person Single Person Child Carer Employee/PAYE & Earned Income Widowed College Fees Medical Expenses

Tax credits

Personal circumstances Single €1,650 Married person or Civil partner €3,300 Widowed person (no qualifying children) €2,190

Single Person Child Carer (SPCCC)

Qualifying criteria for claiming: Must be the parent or responsible for care & maintenance of the child. Single and not jointly assessed, married/civil partner, cohabiting, etc. Can claim only one credit in respect of all qualifying children. Qualifying Child: A child who is under 18. Over 18 and in full time education/undergoing training. Permanently incapacitated before age of 21 or in full time education. Surrender to Second Claimant (SC): SC must meet the qualifying criteria. Child must reside with SC for at least 100 days in the tax year.

Widowed person

Widowed without Qualifying children COP: €35,300 Tax credit*: €2,190 Widowed (pre-2015) with Qualifying children COP: €39,300 Tax credits*: €1,650 + €1,650 (SPCC) Widowed (2015 - 2019) with Qualifying children COP: €39,300 Tax credits*: €1,650 + €1,650 (SPCC) +€ Year of bereavement. *other credits will depend on specific circumstances

Widowed person

Year of bereavement tax credit (must have qualifying child)

Year 1 (2019) €3,600 Year 2 (2018) €3,150 Year 3 (2017) €2,700 Year 4 (2016) €2,250 Year 5 (2015) €1,800

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27/09/2020 9 Employee (PAYE) tax credit

Only applies to Schedule E income. Requires minimum of €8,250 total Schedule E income to receive full credit of €1,650. If less than €8,250, given as 20% of Schedule E income. This figure will include all Schedule E income, including BIK and deduction of Pension Contributions. Unused element cannot be transferred to a spouse. Certain employees cannot avail of the tax credit: Proprietary Director (15%) Spouse/Partner of a Proprietary Director when employed by the same company. Spouse/Partner of a self-employed individual when employed by that individual

Earned Income tax credit

Can be claimed on earned income from trade, profession,

• r employment income.

Maximum credit is €1,500 if qualifying income is at least €7,500 If less than €7,500, given as 20% of earned income. If an individual is entitled to claim both employee and earned income credits the combined amount is restricted to a maximum of €1,650.

Medical Expenses

Most Medical expenses. Non-routine dental costs. Non-routine ophthalmic costs. Any reimbursed amounts (medical insurance, local or health authority, compensation) must be first deducted.

College fees

Tax credit is granted for qualifying fees for third level courses provided by ‘approved colleges’. Maximum amount for each qualifying course is €7,000. The first €3,000 (full-time courses) or €1,500 (part-time courses) is disregarded for each claim. Credit is allowed at 20% of qualifying fees. Only tuition fees and student contributions qualify. Grants, scholarships must be deducted. The relief is available for fees paid by the taxpayer on behalf of any individual.

Examples and questions

Tax band questions

Calculate the total tax before tax credits.

• 1. Carlos is widowed with no dependents and has income of €40,000
• 2. Gary is single with two qualifying children and income of €40,000
• 3. Bruce and Trevor are married. Bruce has income of €50,000 and Trevor €30,000
• 4. Joan and Ron are married. Joan has income of €70,000 and Ron €10,000

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Tax band solutions

Poll 1 - Carlos €35,300 @ 20% €7,060 €4,700 @ 40% €1,880 €8,940 Poll 2 - Gary €39,300 @ 20% €7,860 €700 @ 40% €280 €8,140 Poll 4 – Joan & Ron Joan: €44,300 @ 20% €8,860 Joan: €25,700 @ 40% €10,280 Ron: €10,000 @ 20% €2,000 €21,140 Poll 3 – Bruce & Trevor Bruce: €44,300 @ 20% €8,860 Bruce: €5,700 @ 40% €2,280 Trevor: €26,300 @ 20% €5,260 Trevor: €3,700 @ 40% €1,480 €17,880

Tax credit questions

Calculate the tax credits for each of the following:

• 1. Ann is single, and an employee of AB limited with a salary of €25,000
• 2. Roberta is single with two dependent children and earns €35,000 as a

self-employed carpenter

• 3. Louise is widowed with no dependent children. Her only income is

rent and dividends of €20,000

• 4. Martha who has three dependent children, was widowed in 2018.

She has PAYE income of €35,000

Tax credit solutions

Ann Single person €1,650 Employee (PAYE) €1,650 €3,300 Louise Widowed person €2,190 €2,190 Roberta Single person €1,650 SPCCC €1,650 Earned income €1,500 €4,800 Martha Single person €1,650 SPCCC €1,650 Year of bereavement - 2018 €3,150 Employee (PAYE) €1,650 €8,100

IT Computation: Stephen

Stephen is 19 and single, he has income in 2019 from farm services of €2,500, schedule E of €7,000 (PAYE deducted €200), and received deposit interest net from his bank of €5,360 notes:

• 1. Employee TC (PAYE) restricted to €7,000 @ 20% = €1,400
• 2. Earned income TC restricted to
• a. Case I/II income
• b. €2,500 @ 20% = €500
• 3. (1) and (2) combined cannot exceed €1,650

€ € Income: Case I/II 2,500 Schedule E 7,000 Case IV (€5,360*100/67) 8,000 17,500 Taxed as follows: €9,500 @ 20% 1,900 €8,000 @ 33% 2,640 4,540 non-ref TCs: Single 1,650 Employee/PAYE 1,400 Earned income 250 DIRT 2,640 5,940 Refundable Tax Credits: PAYE deducted 200 Tax payable/(refundable) (200)

Thank you for your time and attention

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