Always one to look for the silver lining, I asked Mary Domoney of Taxing Times if there was any good at all to come out of the losses that some people sustained in their 2008 or 2009 tax year. And guess what? There is - read on!

I asked Mary to be my guest blogger today, and here is what she has to say (of course there is a disclaimer!

DISCLAIMER
Please be aware that these notes are provided for general guidance only, and their accuracy is not guaranteed as laws and regulations change in the Budget and the circumstances of each individual will be different. You should seek professional tax advice with regard to your own individual situation.

Q: “I think my business is going to make a loss this year, can I get any tax relief for this?”

In these challenging times, there will be businesses that have previously been profitable that could now face the prospect of making losses in the current year.  There are options available to get tax relief from the losses now arising.

Without taking any action, tax losses arising this year will automatically be carried forward to be set against trading profits in the future.

For a limited company there is the option to carry back losses to the previous accounting period, thus reducing or even eliminating the tax liability for that period.  This could create a refund of some or all of the Corporation Tax paid for that period.  This could mean a receipt of cash in the current year, which may be very welcome.

For sole traders or partnerships, the situation is slightly different in that losses can not be carried back, but are available to be set against other income in the current year.  However, because personal rates of tax (and levies) can vary from year to year, and the basis on which they are charged, the decision as to what to do with your losses is more complicated. See the following example:

Let’s take a sole trader with an accounting year ended 31 December (who has other taxable income):

•    In the year ended 31 December 2009, he has employment income of €100,000 and a self-employment loss of €40,000
•    His marginal rate of tax is 41%, and PRSI and Health levy is 5%
•    He expects to have employment income of €100,000 and make a profit of €50,000 in 2010.

He has two options:

•    He can set the loss in respect of self employment against his employment income in 2009, and receive a refund of €18,400 (€40,000 x 46%).
•    Or, he could let the loss be carried forward to be set against the profit for 2010 at his marginal rate in 2010.

There is a choice here – receive a tax refund in 2010 of €18,400 (when the claim is made) or wait a further year to perhaps get a higher tax refund due to higher rates of tax (depending on future budget increases).  By the time the claim is being made (in 2010), the budget will have been announced, and the 2010 rates of tax, PRSI and levies will be available for comparison, and the decision can be made at that time.

Assuming that the rates of tax will increase in the budget, it would make sense to carry forward the loss to save more money.

But, when times are tough, an early tax refund from the Revenue could help your cashflow.

Q:  I am self-employed and am going to make a loss this year, and close my business down, can I claim any relief for this?

Losses incurred in the final 12 months of a business (Terminal losses) can be carried back against the profits from the same business for the three years preceding the year that the business closes down.

Let’s take a sole trader who closes his business on 31 December 2009:

•    In the year ended 31 December 2009 he makes a loss of €50,000 and closes the business
•    In 2008, 2007 and 2006, he made profits of €20,000
•    He paid the following amounts of tax, PRSI and health levy:

2006 €2,970
2007 €2,840
2008 €2,770

He can carry back his loss, and use €20,000 against each of 2008 and 2007, and the balance of €10,000 against 2006, creating the following refunds:

2008 €2,770
2007 €2,840
2006 €2,300

The total refund he will receive will amount to €7,910

Q: I will be making a profit this year, and will be liable to the increased levies introduced in the budget.  Is there anything I can do about this?

Since the budget announcement, the self-employed have been worried about the new composite rate levies being charged in 2009.

If your accounting year end is 31 June 2009, all of your profit in the year ended 31 June2009 will be assessable in 2009 and liable to the new levies.

If your year end is not 31 December there may be scope for changing your accounting year end and having some of your profits in your accounting year ended in the current year being put back to 2008, and legally avoiding the levies on the income in the period to 31 December.

However, under the tax rules for changing your accounting date, if you change your accounting date from the year ended 30 June 2009 and create an accounting period from 1 July 2008 to 31 December 2008 (for example), the Revenue have the right to revise your tax assessment for 2007, based on your actual income in that year, rather than on the accounting period to 30 June 2007.

It therefore depends on your profit (or loss) pattern over several years as to whether there would be any financial advantage in changing your year end.

You should discuss this issue with your tax advisor to see if it would be to your advantage to do this.

When switching from PAYE to self-employment, it is very tempting to beleive we have shuffled off the coil of living on a fixed income, and this is true to a point. It is true that as self employed people there is no limit to what we can earn, we have agreed no maximum salary, and along as we can sell more than we can spend, we have an income.

But how much income? As PAYE people, we knew exactly how much income. We got a paycheck that said, this how much we agreed to pay you, this is how much your government wants, and look here, this is how much you get to keep and spend on whatever you want and we are not going to ask for it back later.

Not so for the self employed. We get to collect money that is NOT OURS all day long. People give us money such as VAT, that rightly belongs to the government, ask us mind it for awhile, and then hand it over a few months later, just as we are getting used to it. Did you ever take in a lost puppy, and while waiting for the owners to come, forget that the cute little fluffy fella does not belong to you? You took it for walks, out to dinner, maybe even on holidays. You might have even give it to others to enjoy, like suppliers or employees.

But sooner or later the real owner comes back, taking the puppy and leaving behind with heartache. You have grown far too attached to something that wasn’t yours, and now you have to pay.

So what’s the alternative? How, as self employed people, can we learn to keep a respectful distance from that which is not ours? How do we stop using our business like a credit card at an ATM machine? How much of our profit are we entitled to pocket?

It comes from being aware at all times how much money in the business represents our own puppy, and how much has to be returned to its rightful owner. And how do we do that? First of all by understanding that as self employed people, our business profits are equivalent to our old PAYE gross salary, and keeping an eye on its progress weekly or at the very least monthly. Knowing your profit allows you to work out how much money in your business belongs to you, using the tool I am about to share with you.

For example, we are three months into the year now. Let’s say our profit (sales minus business expenses) to date is 20,000 euros. To project what it will be for the year, I am going to divide by 3 months and multiply by 12 months. That gives me a probable 80,000 profit by year end. To see how much of that is mine, I can use the following tool. The tool tells me that on 80,000 profit, 35% of it will go on PAYE and PRSI. So for every 650 I take out of the business for myself, I better have an extra 350 ready to pay the tax.

I can easily sanity check whether I taken only my money out of the business so far this year, or whether I have dipped into Other Peoples Money. For my 20,000 profit, 13,000 is my puppy. If I have taken more than that so far this year, I need to be aware that I need to take less later, OR sell more! I do need to be aware that if I sell more and my profit increases, my tax percentage will also increase, so I need to go back to the tool to check on this.

 Where’s the tool? It’s right here, please give it a go, any questions just ask!