CHAPTER 16 SUMMARY

A summary of Chapter 16, from Inside Business.

The difference - direct and indirect taxes

Taxation is typically classified into two categories: Direct and Indirect taxes. This is as such because of their differences.

Direct Taxation are taxes levied on the income earned by a household and paid directly to the goverment.

Examples of this include:

  • Income tax

  • Corporate tax

  • Capital gains tax

  • Property tax

  • PAYE Income tax

On the opposite side of the spectrum, Indirect Taxation are levied on what people spend, rather than earnings.

Examples of this include:

  • Sales tax

  • Excise Duty

  • Value-added tax (VAT)

  • Customs duty

THE SIMILARITIES & DIFFERENCES - HOUSEHOLD AND BUSINESS TAXES

Households and businesses are liable for many kinds of taxes. They can be both liable for the same kinds of taxes or have their own individual taxes that they can pay.

Here is a list of the taxes paid by households and businesses:

#TaxHouseholdsBusiness
1Value added tax (VAT)✔️✔️
2Motor tax✔️✔️
3Capital gains tax (CGT)✔️✔️
4Customs duty✔️✔️
5Excise duty✔️✔️
6Carbon tax✔️✔️
7Pay related social insurance (PRSI)✔️✔️
8Pay As You Earn (PAYE) Income tax✔️❌
9Self-assessment income tax✔️❌
10Universal social charge (USC)✔️❌
11Deposit interest retention tax (DIRT)✔️❌
12Local property tax (LPT)✔️❌
13Capital acquisitions tax (CAT)✔️❌
14Corporation tax❌✔️
15Commercial rates❌✔️

The similarities between households and business taxes include:

  1. Registration: Both households and businesses register for tax with the Revenue Commissioners.

  2. Tax Compliance: They both pay the correct amount of tax

  3. Tax Avoidance: Households and businesses use only legal methods to reduce their tax liability, i.e. tax avoidance strategies.

  4. Record keeping: Both households and businesses must keep a record of the amount of taxes owed and taxes paid to the Revenue Commissioners.

The differences between households and business taxes, however, include:

  1. Reduced Tax Liability: Businesses can reduce their tax liability in more ways than a household.

  2. Reclaim VAT: A VAT-registered business can claim back VAT paid on its purchases of goods and services.

  3. Greater Range of Taxes: More taxes apply to businesses, e.g. corporation tax and commercial rates.

  4. Tax Collection: Businesses act as collectors of taxes on behalf of the Revenue Commissioners.

PAYE MODERNISATION - THE IMPROVEMENT OF THE TAX SYSTEM

Over the past couple of years, there has been attempts to modernise the PAYE system; to reduce the amount of taxation paperwork and increase efficency. Before then, in the past, employers had to deal with many taxation forms relating to the employment and end of employment of staff; creating annual paperwork of almost 5 million forms for employers throughout Ireland.

The current, modernised system of PAYE ever since has many benefits for both employers and employees. These can include:

Employers:

  1. Seamless: The employer's payroll systems can integrate with Revenue's system. This means that information on employees can be exchanged automatically, which saves time.

  2. Minimise costs: There are lower costs for the employer, as less staff time is taken up with preparing and processing forms, e.g. P60 and P45.

  3. Abolition of forms: It has led to the abolition of forms such as the P45 (when an employee ended their employment).

  4. Right tax: It ensures that employees and employers pay the correct amount of taxes, It also reduces the number of employees who pay emergency tax.

  5. Time savings: It saves the employer time as forms such as P45s and P60s will not have to be created by the employer, which was time-consuming.

Employees:

  1. Simplified: Employees can access information on their tax credits and tax bands through their online account on the Revenue website.

  2. Maximise the use of tax credits: The employee can monitor their allocation of tax credits during the year to ensure that they don't overpay taxes.

  3. Automatic review: The system undertakes an automatic end-of-year review of tax paid. Employees receive a tax refund if they are found to have overpaid taxes during the year.

  4. Real-time reporting: Employees can log on to their Revenue account to see what taxes they have paid to date..

  5. Transparency: Employees can see that tax deducted by their employer has been paid to Revenue.

THE DIFFERENCE BETWEEN TAX AVOIDANCE AND TAX EVASION

Taxes are essential in a fair country and for a country to function. Of course, however, nobody likes paying them. Because of this, many businesses and households will attempt to not go through the trouble of having to pay taxes. Due of their similar names, many individuals confuse tax evasion and tax avoidance.

Tax evasion is illegal. It refers to when households and businesses paying the correct amount of tax by under-declaring in come or over-claiming tax deductions. Heavy penalties are applied by the Revenue Commissioners for tax evasion.

Tax avoidance is legal. It refers to when the tax liability is reduced for households and businesses legally by using the tax laws (loopholes) to reduce it, e.g. by maximising tax deductions and tax credits while minimising.

THE IMPLICATIONS OF TAXES FOR HOUSEHOLDS AND BUSINESSES

Positive Implications:

  1. Redistribution of Wealth: Taxation helps to redistribute wealth in society. Employee PRSI is used to provide social welfare payments such as Jobseeker's Benefit.

  2. Improved Public Service: The government uses tax revenue to provide public services, e.g. education. This improves the standard of living for all citizens.

  3. Tax Incentives: Tax incentives can be used to encourage businesses to expand or establish in disadvantaged areas. This reduces the cost of setting up or expanding a business.

  4. Lower Rates of Corporation Tax: Low corporation tax rates in Ireland increases the amount of profits that a business can keep.

Negative Implications:

  1. Reduces Disposable Income: PAYE, PRSI and USC reduces employee's take-home pay. This means that households have less disposable income, i.e. the amount they have available to spend.

  2. Higher prices: VAT, customs duty and excise duty increase the price of goods and services. Consumers may buy fewer of these products and/or purchase from businesses outside Ireland to reduce costs.

  3. Regressive Taxes: Regressive taxes such as VAT result in those on lower incomes paying a larger portion of their income in tax than wealthier people.

  4. Overtime: Higher rates of income tax may discourage employees from working overtime, which can make it difficult for firms to fulfil orders at busy times of the year.

  5. Employer's PRSI: Employees must pay employer's Pay Related Social Insurance (PRSI) for each employee, which increases business costs.

  6. Discourages Enterprise: High rates of taxation such as employer's PRSI and commercial rates discourage enterprise. People do not take the risk of setting up their own business.