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As the clocks go back, the income tax deadline looms large and further darkens the day for many. With careful planning, however, this is a challenge that can be managed, even as the ongoing pandemic complicates matters, writes Michael O’Scathaill (taxation director, Crowe).

As in previous years, the pay-and-file deadline has been extended for income tax returns filed using ROS; however, please remember that, to avail of this extension, it is required both to file the return and pay the tax due using ROS on or before 17 November 2021.

Taxpayers are required to pay any balancing amount of tax due for 2020, together with their preliminary tax payment for 2021. This preliminary tax can be based on either 100% of the 2020 liability or 90% of the liability for 2021. The third option – to base it on 105% of the 2019 liability – is at this stage only available to those taxpayers who have set up a direct debit facility. However, this might be something to consider next year (see below).

Many self-employed taxpayers may expect their income for 2021 to be lower than in 2020, so that paying 90% of the expected 2021 liability might give rise to a lower payment. However, for those considering this option, it is important to take the time to forecast their 2021 liability as accurately as possible in advance of the deadline.

Preliminary tax: the 105% option

Often overlooked is the option to pay preliminary tax based on 105% of the liability for the pre-preceding year – that is, preliminary tax for 2021 can be based on 105% of the 2019 liability. This requires a direct debit to be set up with at least three such payments made in 2021, the first one to be made no later than 9 October 2021.

Unless you have already set up a direct debit, it is therefore too late for this year –however, might it be a suitable option next year? The impact of Covid-19 is such that incomes (and consequently tax liabilities for 2020 and 2021) might be unusually low, so that the ‘105% option’ might be attractive from a cashflow perspective in 2022 and 2023. The matter should be considered well in advance of next year’s pay-and-file deadline, however, as the direct debit must be set up by the end of September 2022 at the latest.

Tax warehousing: welcome respite

In light of the pandemic, the Finance Act 2020 provided for the option to warehouse income tax liabilities payable on the pay-and-file deadlines in both 2020 and 2021.

Last year, to avail of income-tax warehousing, a taxpayer’s expected total income for 2020 had to be at least 25% lower than in 2019 as a result of the pandemic. Those that availed of it should now compare their respective returns for 2019 and 2020 to satisfy themselves that this condition was in fact met. This allowed them to warehouse their balancing tax payment for 2019 and their preliminary tax payment for 2020.

This year, the condition to be met is that the expected total income for 2021 is at least 25% lower than in 2019 as a result of the pandemic. Those that qualify may warehouse their balancing payment for 2020 and their preliminary tax payment for 2021. Many solicitors, in particular those with year-ends in the early months of the year, may find that the impact of the pandemic is more pronounced in 2021.

Any income tax liabilities warehoused in either 2020 or 2021 will remain warehoused at a zero interest rate until 31 December 2022, at which point they will become payable, unless a Phased Payment Arrangement (PPA) is agreed with Revenue, in which case a reduced interest rate of an effective 3% per annum will be payable.

Tax warehousing: the fallout

However, while warehousing can provide a welcome respite in the short term, it is important to consider how these liabilities will ultimately be paid. For those who avail of warehousing in both years, they will effectively be facing the equivalent of three pay-and-file deadlines in November/December 2022. Even with declining incomes and consequent tax liabilities for those periods, this can leave a significant tax debt to clear in a short period of time.

As an example, consider ‘Mary’, a solicitor. In November 2019, she paid preliminary tax of €100,000 for 2019 based on 100% of her 2018 liability.

In November 2020, she finalised her 2019 return, which showed a liability of €150,000, leaving a balancing payment due of €50,000. As a result of the pandemic, her income for 2020 was considerably lower, with an estimated tax liability of €100,000. Mary therefore declared her preliminary tax payment to be €90,000, but opted to warehouse this together with her balancing payment of €50,000 for 2020.

Mary has recently finalised her 2020 return, which (as expected) showed a balancing payment due of €10,000. Her income has not recovered in 2021, so that she again qualifies for and avails of income-tax warehousing. She calculates her tax liability for 2021 to again be €100,000 and warehouses €90,000 preliminary tax, together with the balancing payment of €10,000 for 2021.

Mary has now warehoused tax liabilities totalling €240,000. These will become payable on 1 January 2023. In the meantime, in November 2022, Mary finalises her 2021 return, showing a balancing payment of €10,000 as expected, and bases her preliminary tax on 100% of her 2021 liability – a payment of €100,000. Therefore, Mary will have to pay €110,000 in November 2022, a considerable outlay only weeks before the €240,000 warehoused debt becomes payable. Effectively, Mary must raise €350,000 in a very short timeframe – a matter of a few weeks – or, alternatively, agree some form of PPA with Revenue for the warehoused debt.

Mary might also have warehoused some of her practice’s VAT and PAYE liabilities during 2020 and 2021, and these also fall due on 1 January 2023.

Careful planning

What this example illustrates is the need for careful cashflow planning and a strategy for clearing this debt. It is advisable to put aside some funds to meet these liabilities over the next 12 months. One option is to gradually pay down some of the debt while it is in the warehouse. Another option that may be appropriate for those who expect to require a PPA is to ringfence some funds to have available as a down payment for any PPA arrangement.

It is important to note that a PPA is not an automatic entitlement, being subject to agreement with the Revenue, and also that they typically require a down payment of up to 40% of the debt. In addition to putting aside some funds, therefore, it is important that there is timely engagement with Revenue well in advance of 31 December 2022 if a PPA is required.

Tax tips: reducing or managing your liability

Leaving aside the challenges of funding your tax liability, some thought might also be given to opportunities to reduce your liability in the first place. In this regard, your first port of call should be to review your practice accounts; these must be prepared in accordance with accounting standards and principles, but this may present some opportunities to reduce or manage your income tax liability.

Bad debts

It may be a worthwhile exercise for practitioners to review their debtors’ ledgers with a view to identifying debts that may not be collectable. Where specific bad-debt provisions (as distinct from general provisions) are made, these may be deductible from taxable profits.

WIP valuation

Work-in-progress (WIP) is always a key issue for solicitors. There are detailed tax and accounting rules to consider when valuing WIP, but it may be worthwhile reviewing the matter in order to establish if the WIP recognised in the accounts can be reduced, thereby reducing taxable profits and, by extension, the income tax liability for 2020 and 2021.

Tax reliefs

While many of the more popular tax-based schemes have been abolished or restricted in recent years, there are still some options to consider:

Pensions

Tax relief is available for contributions made to personal pensions. Such contributions can qualify for tax relief of up to 40% (unfortunately, they do not qualify for relief from PRSI or USC). Where the contribution is paid by 17 November 2021, relief may be claimed against taxable income for 2020. The maximum contribution that may qualify for tax relief depends on the individual’s age and net relevant earnings, as set out in the table below.

There is also a cap of €115,000 on the net relevant earnings for the purposes of this calculation. For example, an individual who was aged 53 in 2020 and earned €160,000 could make a pension contribution of €34,500 (that is, €115,000 x 30%) and receive tax relief for 2020 at the marginal rate of 40%.

Where preliminary tax for 2021 is being paid based on 100% of the 2020 liability, there is an additional cashflow benefit in the form of reduced preliminary tax, although if the contributions are not made again ahead of next year’s pay-and-file deadline, there may be a significant balancing payment due for 2021 at that time.

EIIS

The Employment Investment Incentive Scheme (EIIS) offers tax relief to individuals who invest in certain trading companies. The tax relief is granted at marginal rates of income tax (typically 40%) in the year in which the investment is made. Therefore, an investment made before the end of 2021 potentially reduces the level of preliminary tax payable for 2021.

However, in considering EIIS investments, the merits of the investment from a commercial perspective and the likelihood of receiving a satisfactory return should be considered in addition to the tax savings.