Even when a business is operating profitably, paying yourself a good salary isn’t quite as straightforward as you think. Owner-managers of small businesses are subject to several obligations that they need to be aware of before they begin paying themselves, along with the same taxes as any ordinary employee. Business owners can, however, control and manage their tax liabilities while still complying with all the Revenue’s guidelines: the key is careful advance planning, organisation and engaging with the revenue authorities when you need to.
Things to consider
Before taking any money from a business, the most obvious and important factor to consider is the company cash flow. A business owner has to be careful about what he’s looking to pay himself if, in turn, it jeopardises the cash flow resources of the business and its ability to pay other key overheads. For example, if he pays himself such an amount that it jeopardises the wages of the other staff or if the cash flow resources are affected to such a point that the company is not in a position to pay the VAT or PAYE/PRSI bill, then the problems begin.
Business owners also have to factor in their personal tax liability. He or she may only have a single person’s tax credits available meaning that, for every euro taken above the standard tax threshold, the business will pay substantially on top of the net amount the business owner is paying him or herself. Despite what some commentators may make out, there’s no special exemption from tax for business owners – they’re exposed to the standard tax rates also, starting with the PAYE rate, PRSI rate and now the Universal Social Charge (USC) rate, which has a particularly damaging effect on the tax situation of business owners earning over €100,000. It’s very probable that, for someone of that income, their average tax rate could rise to over 50%.
Of course, every business wants to limit their exposure and liability – the key is to be organised so that you can take advantage of generous reliefs. One that a limited company can look at is mileage and subsistence. Rather than just hanging on to petrol receipts, the director or owner of the company can complete a revenue-approved spreadsheet that, we feel, gives generous allowances in terms of travel he has incurred on behalf of the company. This is only applicable, though, if the director owns their own vehicle and it’s not owned by the company. Often, directors make the mistake of thinking it’s an advantage to let the company own the motor vehicle. At DCA, we would, in most cases, advise against that because the employer is leaving himself exposed to be taxed on a benefit-in-kind whereby be he will be exposed to an additional PAYE/PRSI charge on it.
Another idea is to employ a spouse that may not be working to avail of tax credits. This is perfectly legitimate as long as that person is actually carrying out work for the company. It could be an administrative role or helping with the paperwork at weekends. And of course, the business owner could have children off for the summer who may be able to help out, for which they could also avail of their tax credits.
Another option is pension planning, where by the business owner can look at the generous reliefs available for company directors, in particular if they look towards setting up a company executive pension scheme. This type of pension has more generous tax breaks than ordinary PRSA/personal pension scheme and is worth investigating.
The compliance issue
Of course, availing of these reliefs calls for organisation and planning. Certain businesses, particularly sole traders, tend to leave their tax returns until the final month before the submission deadline. Our view is that these businesses should look towards getting their tax computations and income tax returns completed as early as possible once the tax year is over. That gives them time to anticipate what lies ahead, both in terms of their ability to pay and also any tax planning measures that they might still be able to put in place to reduce their liability.
Being organised will stand to the company when the thorny issue of compliance comes up. The most important thing is to file VAT returns and P30 returns on time. That minimises exposure to interest or penalties for filing late returns. Far too many businesses end up exposed to unnecessary costs of that nature.
Working for you
At DCA, we come across many cases where we find that client cash flows are in such a situation that they’re not able to pay all their taxes at once. In this instance, we write to the Revenue and look towards an instalment plan. For any clients that are suffering tax problems, we have a very strong relationship with the Revenue and can negotiate on a client’s behalf to help that client trade out of his taxation difficulties at that moment in time.
More than that, though, we like to think of ourselves as a one-stop shop for these smaller businesses. We have a bookkeeping bureau, whereby we look after the PAYE, VAT, and month-to-month tax requirements of the business, and would act as their tax agent when it comes to dealing with the Revenue. We follow up with a client to make sure he sends in books or records promptly so that we can file returns on a timely basis – in general, we aim to have everything completed five months ahead of the deadline to give the client peace of mind to save towards the liability, or to look at measures that reduce the liability, rather than coming to a client two weeks before the deadline. From experience, we know that planning ahead leads to major savings and far less business stress in the medium to long term.
DCA Accountants and Business Advisors