With many people racing to file their Form 11 returns before the deadline, I sat down with tax expert Michael Ryan of Gara Ryan to discuss what you should know before submitting your form this year. You have until 17th November if you file online, which is most people these days.
Who must file a Form 11 with Irish Revenue?
Form 11 is a self-assessment income tax return due on 31st October, or mid-November if you file online via Revenue Online Services (ROS). As well as ‘chargeable persons’ (see the PDF below for a comprehensive explanation of who is considered a chargeable person by Revenue), this form is mandatory for sole traders and proprietary directors.
Sole traders and Form 11
Form 11 covers sole traders where their salary is the profit from their turnover for the year minus expenses (i.e., their taxes are the 40% or 50% they pay on their income/profit via this return).
Proprietary directors and Form 11
Form 11 also covers business owners who are proprietary directors of their companies (beneficial owners, holding more than 15% of the ordinary share capital of the company). They will probably be on the payroll of the business but are also required to submit a Form 11 each year. It’s important to note that proprietary directors must file a tax return even if their salary is their ONLY income. If they don’t file, or file late, they are exposed to surcharge without a credit for PAYE deducted at source.
Let’s look at an example where a proprietary director earns €100,000 per year and paid €38,000 in payroll taxes, but their final liability at the end of the year was only €37,500. In theory, they’re due a refund of €500, however if the return is filed late the entire tax amount of €38,000 becomes surchargeable at 10%.
Non-proprietary directors and Form 11
If a director owns less than 15% of ordinary share capital and their only income is PAYE, they do not need to file a Form 11 return. However, if they have any other income (dividends, rental income, etc.) they will need to file a return. A large part of their income has already been covered by PAYE but there is some extra information that will need to be submitted to Revenue and this is done via the form.
Income tax in Ireland
In Ireland, an individual can earn up to at least €35,300 (which will go up to €36,800 in 2022) at our lowest rate of income tax – 20%. Depending on your personal circumstances, this band may be for a higher amount. Anything you earn above your band will be taxed at 40%.
Typically, we’d recommend that anyone who is a shareholding director of a company to put themselves on the payroll for a salary of around the €30,000-€40,000 per year (depending on their personal circumstances – single/married/widowed, with or without qualifying children, etc.). It’s appropriate to be paid a salary for involvement in the company business and gives a monthly income for paying bills and other expenses.
But if proprietary directors need more than this or have profits that they want to take out of the business, it’s worth thinking through whether this should come out as a salary. The higher rate of tax (40%) for more significant salaries makes it worth considering the other options available to you that may have better outcomes. There is also USC of up to 8% and PRSI of 4%, bringing the top rate up to 52%.
Pension funds and tax breaks in Ireland
One option that is often discussed is pensions. The company can pay into a pension rather than pay you the amount as a salary. This is essentially tax-free up to a very generous limit. This would typically be part of a business owner’s tax strategy – they would have some money going to a pension scheme. A sole trader can also benefit from making pension contributions. If they pay into a pension, it will reduce their overall tax burden (again, the limits are generous here as well).
An interesting feature is that you can make these contributions after the fact. So, you could pay into a pension right now in October 2021 and offset that against your 2020 tax liability. This is for sole traders or directors paying into their personal pension, not for company pension schemes paid into by employers.
Maximising your expenses
Another thing we advise proprietary directors to do is to make sure that they maximise their expenses, because it doesn’t make sense to be out of pocket for costs that benefit the business. If there is a business case for your spending, you are legitimately entitled to claim it back. Examples of expenses might be travel or use of a personal car.
If you do travel in your personal car, make sure you stick to the civil service rates that are published by Revenue. They aren’t as generous as they were in the past, but you should still claim them. We do recommend you keep a log of journeys and reimburse the mileage monthly rather than arriving at a rounded calculation that you balance up at the end of the year.
Home working has really come to the forefront of people’s minds recently. If you rent your home and you work from there, it’s reasonable to claim that as an expense. Let’s say you rent a four-bedroom house and use one bedroom as your office, you could charge the company up to 25% of your rent. The key is to be reasonable here. If that same room is only used for business half of the time, reduce the percentage you claim. Of course, the business should be paying for anything that allows you to work as if you are in the office – a computer, phone, printer, etc.
The eWorking scheme allows an employer to pay employees who work from home a daily sum of €3.20 tax-free (we’ve covered this in detail in this blog on the eWorking scheme). If your employer didn’t pay you for working from home, then you can absolutely claim this tax relief yourself when you submit your Form 11. Remember this is for days that you worked from home instead of the office – the blog I just mentioned explains what Revenue considers to be “eWorking” for the purposes of this scheme.
You can either claim the actual expenses incurred or the €3.20 tax relief per day, but you cannot claim both. You also can only claim if your employer hasn’t already reimbursed you.
Warehousing your tax liability
This time last year, when people were filing their 2019 forms, they were allowed to warehouse their income tax liability if they estimated that their 2020 income was going to be more than 25% less than their 2019 income. They also didn’t have to pay their preliminary tax for 2020 but could warehouse it. This year again, if your estimated 2021 income is going to be over 25% less than it was in 2019, you don’t have to pay your preliminary tax when you file.
All warehoused taxes can be parked, interest-free, until 31st December 2022. From that date, you can repay what you have warehoused via an agreed payment arrangement at a reduced interest rate of 3%. Revenue has made it clear that the timeframe allowed to pay warehoused debt will be flexible and determined by the liable person’s capacity to pay both the arrears as well as whatever current tax liabilities are likely to arise. We estimate it would be reasonable therefore to spread the repayments over 12 or 24 months, depending on the sums involved. We do recommend you keep an eye on your income levels for 2020 and 2021 relative to 2019 and if you’re down by more than 25% and need to warehouse, take advantage of this scheme.