New PRSI on unearned income makes paying self dividends pointless?

14ned

I've been doing up the 2014 accounts for my small consulting service company where both myself and my wife are Directors and therefore paying PRSI @ 4%. The company has about €5000 of past losses @ 25% corporation tax accrued.

What I was going to do is to pay each of ourselves at PAYE up to the USC limit of €10k which avoids USC being paid by the company, and so you pay PRSI @ 4% and €714 income tax on €20k family income and then of the profit remaining in the company you'd offset the €5k against corporation tax @ 25% against profits and pay half of the profits out as dividend to avoid the close company surcharge of 15% on undistributed income. You then settle up USC and any remaining income tax in your tax return (note company profits are less than €5k, so no corporation tax would be paid) and you'd save yourself 4% of €5k (€200).

However, I just read there that you now pay PRSI @ 4% on unearned income too, so I can no longer see any difference in paying out via PAYE or via dividends, except that dividends suck off DWT @ 20% slightly sooner, though in the end the total tax paid ought to be exactly the same.

Paying out all company profits via PAYE would increase company accrued losses to €7k or so, but apart from a constantly rising accrued losses for the company I can't see any financial difference here, and paying everything via PAYE saves me filling in the paperwork for dividend payments and simplifies the corporation tax return, so I'm inclined to go ahead with that. Besides, in some future year I might (highly unlikely, but I can dream) earn some huge income and to smooth over the lumpiness of income tax between years it might be useful to utilise any accrued losses to avoid entering the 42% income tax bracket in some bumper year.

Am I missing something here, or are other small companies in Ireland seeing the same thing here?

Niall

barneystinson

14ned wrote: »

I've been doing up the 2014 accounts for my small consulting service company where both myself and my wife are Directors and therefore paying PRSI @ 4%. The company has about €5000 of past losses @ 25% corporation tax accrued.

What I was going to do is to pay each of ourselves at PAYE up to the USC limit of €10k which avoids USC being paid by the company, and so you pay PRSI @ 4% and €714 income tax on €20k family income and then of the profit remaining in the company you'd offset the €5k against corporation tax @ 25% against profits and pay half of the profits out as dividend to avoid the close company surcharge of 15% on undistributed income. You then settle up USC and any remaining income tax in your tax return (note company profits are less than €5k, so no corporation tax would be paid) and you'd save yourself 4% of €5k (€200).

However, I just read there that you now pay PRSI @ 4% on unearned income too, so I can no longer see any difference in paying out via PAYE or via dividends, except that dividends suck off DWT @ 20% slightly sooner, though in the end the total tax paid ought to be exactly the same.

Paying out all company profits via PAYE would increase company accrued losses to €7k or so, but apart from a constantly rising accrued losses for the company I can't see any financial difference here, and paying everything via PAYE saves me filling in the paperwork for dividend payments and simplifies the corporation tax return, so I'm inclined to go ahead with that. Besides, in some future year I might (highly unlikely, but I can dream) earn some huge income and to smooth over the lumpiness of income tax between years it might be useful to utilise any accrued losses to avoid entering the 42% income tax bracket in some bumper year.

Am I missing something here, or are other small companies in Ireland seeing the same thing here?

Niall

You're not missing anything. It's conventional wisdom that dividends are a very tax inefficient method of cash extraction for owner/managers in Ireland.

What you missed out in all your scheming and calculating above is that to save yourself €200 now you were reducing losses carried forward (ie increasing future taxable profits) by €5k. Given a tax rate of >25% that's a cost over time of ~€1k... no matter what way you stack it up your idea was always going to be tax inefficient.

14ned

barneystinson wrote: »

You're not missing anything. It's conventional wisdom that dividends are a very tax inefficient method of cash extraction for owner/managers in Ireland.

What you missed out in all your scheming and calculating above is that to save yourself €200 now you were reducing losses carried forward (ie increasing future taxable profits) by €5k. Given a tax rate of >25% that's a cost over time of ~€1k... no matter what way you stack it up your idea was always going to be tax inefficient.

It's probably me lacking experience from only having done Accounting at the Leaving Cert (got an A though), but a large negative Shareholder's Funds from continued losses seems improper. I've always tried to keep my accounts as unconfusing as possible, it makes them less of an overhead and things easier if an audit happens.

And also I never expected for the company to ever make much profit into the future. The Corporation Tax rate of 25% along with the close company surcharge make ever having a profit a bad idea. These accrued losses are actually due to an accounting mistake of mine back just after the economic collapse, so basically Revenue reallocated my accounts to eliminate me claiming back past corporation tax just after the collapse back when I was also trading goods and wasn't a pure services company. They've been sitting there since, and not doing much for me.

Anyway thanks for the feedback, I'll proceed with paying everything out via PAYE so and let the company record a loss.

Niall

Alan Shore

I'm confused by your post.

You have losses forward @ 25%. 25% applies to rental profits or interest income?

You are already subject to PRSI on dividends as a Class S contributor.

If you put up some figures I'm could comment but it seems to you are over complicating the issue.

14ned

Alan Shore wrote: »

I'm confused by your post.

You have losses forward @ 25%. 25% applies to rental profits or interest income?"

What happened was that back during the boom I was importing stuff from china in addition to providing consulting services. The import and resale trade gets a 12.5% corporation tax, whilst the consulting services gets a 25% corporation tax.

When the collapse happened I took a hefty loss on stock to get rid of it before it lost all its value. For that tax year when filling in my return I tried to reclaim the previous year's corporation tax payment, and I apportioned the reclaim by dividing the losses between the 12.5% and 25% rates on the basis of average proportion of earnings over the past two years. That turned out to be a mistake because you can't offset losses against taxes paid from different trading types, but I didn't know that at the time.

Revenue then rejected the claim on the 25% taxed part because the losses occurred in the trading not services part, so I got paid back the corporation tax on the 12.5% bit only and for the 25% part I got those losses back and they've sat on the Revenue account since.

I almost certainly could have brought in a professional accountant and got that fixed at the time, but by then the economy stank and I needed to emigrate to survive, so I left for Canada and left it at that.

I'm back now the economy is better, though all my customers are not Irish so I am now a 100% services export firm. I certainly never intend to touch goods trading ever again, it's risky, unprofitable work. In consulting services you are tied to your computer all day, but it's a nice regular income without having to hawk stuff at people.

You are already subject to PRSI on dividends as a Class S contributor.

If you put up some figures I'm could comment but it seems to you are over complicating the issue.

I think so too. I was just surprised that PAYE is the most tax efficient way, that's all. I'm not complaining, as I mentioned it makes the paperwork a lot easier.

Niall

14ned

Alan Shore wrote: »

I'm confused by your post.

You have losses forward @ 25%. 25% applies to rental profits or interest income?

It occurred to me you are confused why I paid corporation tax @ 25% on consulting income, and not 12.5%.

The answer was that back in the day when I first set up the company I never expected to make much profit from consulting as it's double taxation (once as corporation tax, again as income tax). And in those days, it was not clear on the Revenue website whether a professional services company engaged in trading or not (after all, what is one trading?), so I figured at the time best to write down 25% and then no one could claim I was defrauding Revenue. You have to remember I expected an audit in the early days because I knew I had no idea what I was doing, so I was over cautious.

I made an enormous number of mistakes due to inexperience in the early days, and that was one of them. But don't get me wrong, the overpayment of corporation tax involved is tiny, less than €1000 so it hasn't been worth paying a professional to sort it out, especially as it would have opportunity cost (I wouldn't be earning) while I dug out all the stuff my end.

Now, that said, for the 2014 corporation tax return I will probably have to bring some professional advice in because if I'm going to book a loss, it will be at 12.5% and I need to figure out some way of asking Revenue to readjust all my previous corporation tax returns to undo the 25% misclassification. Or I might simply not bother, and book 2014 at 12.5% and get on with earning as time spent dealing with this - which won't earn for me any time soon - is time not spent earning.

Hopefully this resolves the confusion.

Niall

barneystinson

14ned wrote: »

It occurred to me you are confused why I paid corporation tax @ 25% on consulting income, and not 12.5%.

The answer was that back in the day when I first set up the company I never expected to make much profit from consulting as it's double taxation (once as corporation tax, again as income tax). And in those days, it was not clear on the Revenue website whether a professional services company engaged in trading or not (after all, what is one trading?), so I figured at the time best to write down 25% and then no one could claim I was defrauding Revenue. You have to remember I expected an audit in the early days because I knew I had no idea what I was doing, so I was over cautious.

I made an enormous number of mistakes due to inexperience in the early days, and that was one of them. But don't get me wrong, the overpayment of corporation tax involved is tiny, less than €1000 so it hasn't been worth paying a professional to sort it out, especially as it would have opportunity cost (I wouldn't be earning) while I dug out all the stuff my end.

Now, that said, for the 2014 corporation tax return I will probably have to bring some professional advice in because if I'm going to book a loss, it will be at 12.5% and I need to figure out some way of asking Revenue to readjust all my previous corporation tax returns to undo the 25% misclassification. Or I might simply not bother, and book 2014 at 12.5% and get on with earning as time spent dealing with this - which won't earn for me any time soon - is time not spent earning.

Hopefully this resolves the confusion.

Niall

Oh. Em. Gee.

For the love of jaysus get an accountant quickly, before you cost yourself a fortune.

14ned

barneystinson wrote: »

Oh. Em. Gee.

For the love of jaysus get an accountant quickly, before you cost yourself a fortune.

Before the collapse, accountant's fees relative to what I was earning at that time made getting an accountant a poor cost benefit choice. You're talking maybe €20k revenues over three years, really not a lot, the company was basically my thing on the side and I could afford to pay for any mistakes at that time. I was then away in Canada for some years, and when I left I didn't expect to return.

This year, 2014, is the first where the monies earned by the company are my primary income, and the potential cost of mistakes make it worth getting an accountant because I can't bail myself out from employee income any more. And yeah I know I need to put aside some time and make it happen early next year, though finding a competent reasonably priced accountant is hard (if there are any reading in the Mallow area, PM me). I'll get to it.

Niall

Marcusm

I would probably start with a new company if you are not going to sort out the past. Issues as to whether your time in Canada resulted in a permanent discontinuance of the trade will continue to dog you.

14ned

Marcusm wrote: »

I would probably start with a new company if you are not going to sort out the past. Issues as to whether your time in Canada resulted in a permanent discontinuance of the trade will continue to dog you.

It's a good point, but I think on this at least I am good. Only one year passed where no revenue was recorded, but expenses for server rental etc continued to be paid out, so P30's, VAT3's and CT1's were still filed. Technically speaking I could have subcontracted work out despite myself being in Canada.

Niall

NewApproach

You need professional tax advice 14ned, quickly.