The dreaded day of reckoning has come and you are now having a revenue audit. Do you have a problem? Here is the list of some of the things we have found to be the most visited by revenue.
1 Pension special contributions.
One of the advantages of running a limited company is the better availability of tax relief for pensions. But one needs to be careful here as the revenue differentiates between an “”Ordinary” Contribution and a Special” Contribution.
An ordinary contribution is the annual routine pension payment that you make every year whereas a special contribution would be a large once off payment. A Special contribution is required to be spread over a number of years determined by a specific formula.
Although the actual tax ultimately payable is the same, it is the timing of the liabilities that is the issue. The revenue can charge interest and penalties in the year the tax is under-declared but don’t have to pay you interest in the years the tax is over-declared. A very costly and expensive oversight indeed.
2 Casual labour
Casual labour is increasingly seen by revenue as an easy way to raise a rather expensive settlement from the tax payer. First, if any payments are identified as casual wages, they will insist on the emergency tax basis being applied to the payment. Next they will presume that the person worked the whole summer and not just the two weeks that he appears in the books. Finally the undeclared VAT on the income required to pay the casual wages and all the interest and penalties that goes with it are levied.
For this reason, casual wages nearly always turn out to be an expensive way to deal with a short term labour requirement. I would always recommend that you operate the payroll system properly for all these staff members.
3 Capital V Revenue
An area of much contention is the split between capital and revenue expenses. Certain payments are always taken as revenue, but there are other areas where the split between the two may not be so simple. Legal fees for the collection of a debt may be classified as revenue but if it is for the granting of a lease or the transfer of some property it is classified as a capital expense. Capital expenses are not allowed in the year of expenditure but spread over the next eight years as capital allowances.
4 Sponsorship
It is usual for the revenue to take sponsorship as a form of advertising. However they will look further into this if the payments are very large or it is in an area where the business owner has a specific interest. For example expenditure on a corporate box at a sports stadium may be viewed as having a significant element of personal expenditure and client entertainment rather then advertising, especially if the amount of advertising exposure for the business is very low.
5 Mileage & Subsistence/BIK
If you are using the Civil Service Mileage rates it is vital that you keep proper records of mileage and subsistence that are required. In no circumstances will it ever be acceptable to receive round sum expenses in lieu of mileage. This is even if you can explain where you went to and what the expenses are for. Also if you claim the mileage rates you cant also claim the receipts as well.
6 Employee v Employer
There are many aspects to this area which could be a blog all of its own. Basically whether a person works for you as an employee or a subcontractor depends on the nature of the arrangement.
If a person who you treat as an subcontractor is found to be actually an employee then you will be subject to PAYE and both employer and employees PRSI. Interest and penalties and the use of the emergency tax basis has been known to be applied.
Before any revenue audit a careful review of subcontractors and those people who are on an invoice basis is vital.
7 Loans to directors
Always a very topical subject with the revenue. If a director’s loan is showing a debit balance, the company is required to pay tax at the standard rate on the loan to the revenue. This tax is repayable when the loan is repaid.
Again, the main draw for the revenue is the interest that is payable from the time the tax should have been paid to the time the tax is refunded.
8 Close company surcharges
The company is required to pay over a surcharge on certain types of income which are retained within the company and not distributed to the shareholders in the form of a dividend. This income would be either rental or investment income or professional services income.
9 BIK on health insurance payments
Normally a person who incurs health insurance payments obtains tax relief at source from the provider of the health insurance. However, if the premiums are paid before tax, there are adjustments to be made to the company’s corporation tax return. The employee is subject to BIK on the gross payments made to the health insurance provider but also gets the 20% tax credit they are due.
As it is the company itself that is responsible for calculating and deducting the BIK this has led to large settlements being made to the revenue.
10 Directors personal tax
The interaction between the company and the directors personal tax return is always a source of review in any revenue audit. The correct tax credits and PRSI rates are often the source of contention. Other items not dealt with correctly can lead to a costly settlement.
11 RCT
If your business operates in the construction, forestry or meat processing sector you will have encountered Relevant Contracts Tax before. However you may not be aware how strictly the revenue apply the rules. If you pay any person who supplies labour, not in possession of a C2 you are obliged to deduct 35% of the total payment and pay it over to the revenue.
There is no lower limit to this rule and this area will always be reviewed by the revenue on a visit.
12 Poor tax Planning and Advice
It is often the case that a tax payer can hear conflicting advice from a number of different sources which often tend to be incorrect or half true. It is important that you always get advise from a trusted and qualified adviser before you undertake any important transaction. It can be almost impossible to fix the tax consequences of a badly executed transaction without a downside for the taxpayer.
13 Registration for PRTB
If you have private rental property you must register each of the tenant with the PRTB. If you fail to do this you will not be entitled to a deduction for the interest on any loan taken out on the property.
You must also register all the tenancies in any particular year to be allowed the deduction. But most importantly you cannot register a tenancy that has already ended, it must be ongoing. This has led to very large liabilities being raised on rental income. This is even where the property is actually loosing money.
14 Keeping all till rolls
The revenue have tightened up on the keeping of till rolls and they must now be numbered sequentially.
It should be noted that the revenue have been in consultation with all the manufacturers of cash registers and will most probably know more about how your till operates then you do. They know all the tricks and schemes that can be used eg. operating the till in training mode etc.
If your turnover looks low and you do not have till rolls to back it up, you will have difficulties trying to justify it to revenue.
A revenue audit can be a very stressful event in any business but the key is to ensure that you have a good handle on all of the above before you are called and your number is up.
If you need any further advice and information about any of the above do get in touch with us at info@irishaccounts.ie
The information contained in this blog is for general guidance on matters of interest only and should not be construed as professional advice or service.As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.