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This time of year is always a busy period for the self employed business owner as it is the time when they must make their annual return of income (Form 11) to the revenue. For a number of years Ireland has operated a system of self assessment. This system puts the onus on the tax payer to make a correct return and file it on time. This whole process can be very daunting especially to those who are approaching self assessment for the first time.

A PAYE employee’s tax is primarily the responsibility of the employer and is deducted every month from their salary.

However if you are self employed you must make an annual return (Form 11) to the revenue by 31 October every year and pay over all the tax that is due in the previous tax year in one single payment. The tax year runs from the 1 January to 31 December. If you have a sole trader business or a partnership, you will be subject to tax on the profits earned in the accounting year that ends in assessable tax year.

At the same time, you also need to estimate the tax you are going to owe in the current tax year, in advance. This estimate must also be paid over to the revenue and is called preliminary tax.

Your estimate of preliminary tax must be at least the lower of

a)       either 100% of the previous year’s liability or

b)      90% of what you think the current year’s liability is going to be.

If you do not pay enough preliminary tax then you may be subject to interest on the underpaid amount. This interest will be backdated when you eventually file your tax return for the year and can turn out to be a very expensive error. If in doubt it is always wise to use option a).

If only to make it more complicated, you also need to increase your preliminary tax estimate to take account of the infamous Income Levy which this year comes in at an extra 1.66% for the year.

If you file your return late, you will be subject to a late filing surcharge of 5% if within 2 months and 10% if greater than 2 months. The sneaky thing is that the surcharge is not based on the remaining balance owed but on the gross tax liability net of any payments you have made. This can mean that a person believing they have no tax to pay, filing late, is likely to receive a penalty of several thousand euro. This is especially true of company directors as even though their income tax is dealt with through the PAYE system, they are effectively self employed. They are subject to self assessment rules and are required to file a personal return by 31 October.

The best way to make sure that you get through the deadlines without undue stress is

a)      If you have an accountant, make sure you give him all the information on time and well in advance.

b)      File your return online if you can as this gives you until the 16 November before it is deemed by revenue to be late.

c)       During the year be aware that you will be making one of the largest payments of the business in October every year. You must ensure that you have set aside the necessary funds and cash-flow to cover this liability.

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