The Shadow Economy

The Shadow Economy

The shadow economy costs every tax payer money through higher taxation. If everyone declared the income they made then the tax take would increase significantly and the tax burden on an individual basis would fall so we would all pay less.But of greater concern is the effect people,operating with out paying taxes, have on legtimate business. If you are a carpenter qouting for a job and you competion is some guy who pays no tax and no insurance then you just... simply cannot compete. The home renovation scheme has helped alleviate this to some extent in the building industry but it still is a prevalent hinderance to fair trade through out all sectors of the economy.
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1. What is the shadow economy?
In general, shadow economy activity is activity in respect of which businesses (including professions) and individuals engage in inappropriate practices with the aim of not complying with their legal obligations relating to matters such as taxes & duties, PRSI, licenses and employment. Shadow economy activity includes -
not declaring, or under-declaring, a source of income (for example, not declaring or under-declaring 'cash jobs') so as to avoid tax and other liabilities;
employers paying employees in cash under an 'off the books' arrangement so as to evade tax and PRSI liabilities;
'working and signing' - working or running a business whilst at the same time claiming falsely job-seekers benefit from the Department of Social Protection;
non-operation of the VAT system;
tobacco smuggling including the sale of illegal tobacco products;
oil laundering including the sale of washed diesel.
Most of the shadow economy activity takes place within that which is referred to as the ‘cash economy’ (i.e. the payment for goods and services by way of cash).
2. What are the main effects of shadow economy activity?
Shadow economy activity –
reduces tax, duty and other revenues owing to the State;
creates an un-level business playing field that has a negative impact on legitimate businesses as regards competitiveness, sustainability and long term job creation.
3. Reporting shadow economy activity
You can report (or report via your representative body) to Revenue details of shadow economy activity by using our Online Reporting Form. Alternatively, a report may be made by way of a telephone call to your local Revenue office.
Frank McGivney & Co. Ltd Tel 0469293891 email fmcgivney@live.com

How to Save €5360 in income tax

How to Save €5360 in income tax

Reducing your tax liability using Standard Rate Cut off Point

Figures used are the 2016 ones.

In Ireland you pay tax at the lower rate of income tax (currently 20%) up to point you exceed your standard rate cut off point after this you pay the higher rate.

Examples

(1)    Single Person their first €33800 of income is taxed at 20% and the balance (anything from €33801 and above) is taxed at 40%.

(2)    Single parent the first €37800 is taxed at lower rate then rest at 40%

(3)    Married couple one income the first €42800 is taxed at 20% then balance at higher 40%

(4)    Married Person two incomes the €42800 is increased by a max of the lower income or €24800. So the maximum at lower rate is €65600 (€37800*2)

Implications and Tax planning to maximise the amount of Income taxed at 20%

(1)    If you are a PAYE worker then there isn’t a whole lot you can do in relation to tax cut off points because you generally can’t split your wages between yourself and our spouse.

(2)    If you are a PAYE worker with the joyous position of having your choice of jobs at different wages rates then the ideal situation to minimise tax is to have one income at €42800 or less and the other at whatever adds up to a balance of €65600. So wife on €40000 then husband on €25600. This allows for all your tax to be at 20%.

(3)     If you are self-employed and earn more than €42800 per year then there are two scenarios

a.       Your spouse works. If he/she is on less than €24800 then you should set up a partnership or employ her in your company and bring her/his income up to €24800 and therefore reduce your taxable income by the same amount.

b.      Your spouse doesn’t work and has no other source of income then you should have him/her as a business partner or company employee. Then split the profits so at least one earns €24800 and the other earns the balance (or indeed any split as long as one is above €24800).

(4)    The Maximum benefit from 3b is for someone earning €65600 or more. If the €65600 is all in one spouses hands then the tax is €42800x20%+€24800x40%= €18480 (less their tax credits). If the income is spread then the full €65600 is taxed at 20% so €65600*.2=€13120. This equates to a saving of €5360 (€18480-€13120). There are also saving in Universal Service Charge which I will analysis in a different article. However there is one bite in the tail in that you lose the Home Carers allowance of €1000 (but still well worth it). It also may not be suitable for some people in certain circumstances such as those on social welfare.

The above is for general information purposes. Each individual case is different and you should get advice from your accountant on all tax planning issues.

© Frank McGivney & Co Ltd (046)9293891  Date written: 22.04.16 

Universal Service Charge

 My Views on the Universal Service Charge (USC) and how it is acting as a disincentive to investment in Ireland
By Frank McGivney

This is a simplified analysis and doesn’t take into account more complex tax issues but does apply to most small and medium size businesses and Paye workers.
The government of Ireland imposed a further tax on the Irish people in 2011. It’s called the universal service charge (USC for short). Never has a name been more appropriate for a tax because it is applied in a way that is universal to peoples income and it even is based on income that people never even receive. This tax is charged on your income in a given year at the following rates generally
The first Euro 10036 is taxed at 2%
The next Euro 5980 is taxed at 4 %
Then the balance is taxed at 7% i.e. anything above Euro 16016.
This is of course on top of your income tax and Prsi payments. Now with income tax if you are self employed you are taxed after you take away any losses you may have had in previous years and also after you have taken away your pension contributions and after you take away capital allowances (which are the allowances for the purchase of fixed assets such as heavy machinery, motor vehicles etc. which you are allowed at 12.5% per year). However USC is calculated before you deduct these items. This means that you are paying a tax on your absolute total income for a year with out taking into account any pension contributions or more importantly without allowing you to write of losses forward or capital allowances.
In order to set up a business you need usually to invest in machinery or vehicles at the beginning in order to get it up and running. This often times involves buying machinery or motor vehicles etc so that you can actually carry out the business. Then these are allowed against your income tax, however they are not allowed generally for USC purposes. In other words you may spend a large amount on starting the business up in order to make a living for yourself and to give employment and you are in effect taxed on this investment.
In the first few years of business it is common to make a loss and of course you can make a loss at any stage of running a business. It is standard good practice in most countries with a proper tax system that you are allowed to write of these losses in future years to reduce your tax liability. This is a very important aspect of the tax code as it allows a business to get over loss making years and continue to provide employment and to hopefully be a success. However USC circumvents this by being calculated before losses are deducted. Once again this is a disincentive to investment and entrepreneurship as any self employed person or company needs to be able to recover from its losses by having tax relief.
Paye workers probably do not even realize that USC is calculated on their income before pension contributions. A lot of people who make pension contribution have no option but to pay them for example anyone in the civil service. In effect what is happening is that their pension contributions are reducing their net pay by 7% of the contribution if they are already earning over Euro16016. So they are coming out with less money in their pay packet based on income that they can never have received. I know the pension contributions will benefit them in the long term. However I believe that up to a certain level pension contributions should be tax free. The reason been is that the way the government is running the country we are most likely going to be bankrupt in the future. This is because there is no way we will be able to pay back the current debt burden that they are imposing on us, in order to repay the bank debts. If this happens we will be either poverty stricken or subservient to the powers in Europe and people can forget about getting old age pensions. So it’s vital that we put money aside for our own future incomes. This should in my opinion be limited to exclude relief for massive pension contributions for the wealthy.
In my opinion this is a completely unfair tax but it is the tax that the government will increase in the budget, as a 1% increase in USC will have a much greater tax take effect than an increase in any other tax. I have no problem with a high tax regime. In fact I think that in order to stimulate growth that governments should be elected that alternates between high and low tax regimes. This is a reflection of the inertia of the human condition. In order to stimulate an economy it has to be hit with different tax and economic policies over time. This would in my opinion help to prevent the swing from depression to recession. However a basic requirement of a high tax regime been successful is that the tax take is then used by the government to increase their capital and current expenditure. This way the tax taken is kept in the domestic economy and stimulates growth. However the huge mistake been made at the moment is that the tax is in fact been taken out of the economy to repay bank debts to foreign bond holders. This is just draining the economy. I would in fact accuse the current government of implementing the very same policies as the government did in the boom except in reverse. So in the boom the government drove a boom higher and now in a recession the current one is making the same mistake in reverse by driving us further in to recession. However that’s an argument for another article.
Frank McGivney is a practicing Chartered Management Accountant in Kells Co. Meath, Ireland and can be contacted at fmcgivney@live.com .














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