What the feck is Preliminary tax

StereoSound

Someone explain to me how this works.

If I start a new business today as a sole trader, my first tax return will be in October 2020 for 2019 earnings. So in 2020 I have to pay my 2019 tax return AND pay another (preliminary) tax return for 2020 ? So it's basically two returns I have to pay in 2020 ? This is my limited understanding of preliminary tax.

I was self employed years ago and don't remember paying preliminary tax. All I did was hand in a tax return for the previous year every October. This was about 10 years ago. Was it optional back then but compulsory now to pay preliminary tax ?

Thanks

is_that_so

It's an estimated tax and you'll offset it against the following year's tax total.

https://www.revenue.ie/en/self-assessment-and-self-employment/guide-to-self-assessment/what-is-preliminary-tax.aspx

StereoSound

is_that_so wrote: »

It's an estimated tax and you'll offset it against the following year's tax total.

https://www.revenue.ie/en/self-assessment-and-self-employment/guide-to-self-assessment/what-is-preliminary-tax.aspx

But I still have to pay for it in advance, right ? It's not a guess I'm just writing down on a form ?

drunkmonkey

You should have paid it back then as well. Should being the stand out word.
The daily interest rate they can charge is 0.0219% to put that into perspective it's €2.19 per 10k perlimary tax owed per year. They can also hit you with another 5 or 6% penalty.
So absolute max penalty is €2.19 + if they really don't like you an extra €500/€600

StereoSound

Am I right to say I don't owe any preliminary tax this October 2019 if I were to register as a sole trader today ?

StereoSound

drunkmonkey wrote: »

You should have paid it back then as well. Should being the stand out word.
The daily interest rate they can charge is 0.0219% to put that into perspective it's €2.19 per 10k perlimary tax owed per year. They can also hit you with another 5 or 6% penalty.
So absolute max penalty is €2.19 + if they really don't like you an extra €500/€600

My earning back then were a joke, less then 10k a year for 3 odd years I was self employed. That's why I closed up. I don't think you even paid tax on earnings that were less then 10k a year back then.

barneystinson

StereoSound wrote: »

Am I right to say I don't owe any preliminary tax this October 2019 if I were to register as a sole trader today ?

Your obligation may be nil.

If you make a taxable profit you’ll have an income tax liability though.

I think you’re missing the point, and the inherent logic, of preliminary tax though:

A PAYE worker earns their pay and pays their tax on it, as they earn it (hence Pay As You Earn).

A self employed person also generally earns their income throughout the year, and by October/November (depending on seasonal factors) will have earned the majority of their income for the year - so should they not be able to manage their cash flow to ensure that they’ve set aside an amount for their income tax?

The problem is people tend to do exactly what you’re after asking about there - they pay no tax in Year 1, despite having earned that money and accrued a liability... then in year 2 they have to finance year 1’s tax bill in full AND preliminary tax for year 2... many will simply fudge, and pay the year 1 bill and a bit towards year 2... and this cycle repeats endlessly. Not because of anything inherently unfair in the tax system (since your obligation to pay the tax roughly coincides with the earning of the money, fundamentally like a PAYE worker), but because of people’s ignorance of what is required, or of exactly how much their income is , and the resulting liability.

Certain sectors (eg construction (RCT) and professional services (PSWT)) have forms of withholding tax in place to facilitate the collection of tax from people operating in those sectors.

Given that your attitude is the norm rather than the exception, it’d probably be helpful to a lot of people if their invoices were subject to withholding tax so they weren’t put in a position of having to be given a big piece of bad news every so often, and after the horse has bolted.

drunkmonkey

You probably didn't owe any tax then. The question here is do you have to pay it, yes. What happens if you don't? You can get fined, can you make more with the money than the cost of the fine after paying it if it ever happens? Can you keep good books and be ready for an audit at any time. It you can answer yes to the last two question I'd roll the dice and not pay it if it's going to impede your business growth.
I never really got the concept especially for someone starting off. It's not like the Government can spend the money until you owe it, it's still your money.

StereoSound

I did my own taxes and managed my books before. I'm good at keeping records. It's just a bit nerve wrecking filling out those tax return forms. I'd like to let an accountant handle my tax returns next time I startup a business.

Are there any good sites that can walk you through doing your own tax returns ? Any courses out there that I can attend ?

wiggle16

Here is the text from one of my posts in response to a similar question a while ago. The question referred to the 2018 tax year, ie, a person filing their 2017 Form 11 in 2018 and asking about preliminary tax for 2018:

There are three options you have when paying preliminary tax. The requirement to pay preliminary tax depends on what liability you have for the year you are filing for and whether you anticipate having a liability in the following year.

When you file your return you will end up with one of 3 situations:
a) a liability
b) a refund
c) a nil tax balance, where you neither owe nor are owed money.

You have three options for paying preliminary tax for 2018:
1) 105% of your liability for the year before last (2016, so not an option in your case)
2) 100% of your liability for the previous year (2017)
3) 90% of your estimated liability for the current year (2018)

a) If you filed tonight and had a liability of €100, you can either pay €100 preliminary tax under option (2), or you can pay 90% of what you think you will owe for 2018 (for example, if you've had a good year or a bad year and you think you will have a much bigger or much smaller liability for 2018, you can pay 90% of what you think you'll owe). Either of these satisfies your preliminary tax obligations for (a).

b) If you get a refund, for preliminary tax purposes this means you had a liability of zero. You can pick option (2) and pay no preliminary tax (since 100% of 0 is 0). Or if you think you'll owe money for 2018 you can pick option (3) and pay 90% of it.

c) If you balance, then you've zero liability and it's the same as (b) above.

Sorry for the long post but preliminary tax is notoriously confusing if you're not familiar with it. Basically, if you have a liability, then you have to pay something in order to be compliant with preliminary tax obligations.

There's no surcharge, exactly, for not paying preliminary tax on time. However, if you had a liability of €1000 when filing return for 2017, and paid zero preliminary tax for 2018, then if you have a liability next year when you file for 2018 there may be penalties applied, and the liability is due immediately (ie, you don't have until 31/10/2019 to pay it, Revenue want it there and then, because you didn't satisfy your obligations).

Hope that's kinda clear