Chapter 12- Taxation

Question 1

What is taxation?

Answer 1

Money paid by people and businesses to the government.

Used to run the country.

Question 2

Explain what are the reasons for taxation?

Answer 2

To raise money to run the country- pay for government services ex: building roads, running schools
To redistribute wealth- Take money from well off and give to less well off.- government takes higher % of tax from higher waged people- used to pay social welfare
To discourage consumption e.g cigarettes- more expensive so we buy less products who are bad for us

Question 3

Explain direct taxes

Answer 3

Taxes that are imposed directly on income and are usually deducted at source.
Ex: Pay As You Earn (PAYE); Deposit Interest Retention Tax (DIRT).
Considered to be progressive - those earning the highest income pay the most taxes.

Question 4

Explain indirect taxes

Answer 4

Taxes on goods or services.
Ex: Value Added Tax (VAT).
Are regressive meaning the rate of tax is the same for everyone and therefore the burden of tax falls heavily on those on lower incomes.

Question 5

What taxes are paid by households?

Answer 5

Tax on Wages: PAYE, PRSI, USC
Value Added Tax (VAT)
Capital Gains Tax (CGT)
Capital Acquisitions Tax (CAT)
Deposit Interest Retention Tax (DIRT)
Motor Tax

Question 6

What is PAYE and what are the current PAYE rates

Answer 6

Pay as you earn is a tax on wages
PAYE is calculated by employer and deducted from an employee’s gross salary
20% on the first €35,300
40% on the balance
Tax Credits then deducted from the PAYE tax paid

Question 7

What is the formula for PAYE

Answer 7

Formula: (Gross Pay x Rate of Tax) – Tax Credits

Question 8

What is tax credit and the current rate

Answer 8

Amounts deducted from an employee’s wages reducing their overall tax bill.
Not refundable.
Different people qualify for different tax credits depending on circumstances.
All employees who work for a company receive a PAYE tax credit which in 2019 is €1,650

Question 9

What is PRSI

Answer 9

Pay related social insurance- taken from employee’s wages by employer and paid to revenue
Current rate of employee PRSI is 4%
Qualifies employees for welfare benefits (e.g jobseeker’s benefit)
Employer’s also pay PRSI for every employee they employ (Employer Tax Rate: 10.95%)

Question 10

What is the formula for PRSI

Answer 10

Formula: Gross Income x Rate of PRSI

Question 11

What is formula for USC

Answer 11

Formula: Gross Income x USC rates

Question 12

What is USC

Answer 12

Universal social charge -tax payable on ALL income (not just wages).
Introduced in 2011.
Introduced as way of making money for government during the recession. Currently being phased out.
Employers deduct from employee’s wages
Progressive

Question 13

What are Current USC rates?

Answer 13

The current USC rates are: 0.5% (€0-€12,012), 2% (€12,013 - €19,874), 4.5% (€19,875 - €70,044), 8% (€70,045 - €100,000) and 11% on €100,001+

Question 14

Explain a P45 form used in PAYE tax

Answer 14

Form given to employee when they leave their job.
Contains details of the employee’s Gross Pay, PAYE, PRSI and USC from the start of the year up until the employee leaves the job.
Form needed to claim social welfare benefits or is given to payroll in new job so they can calculate your wages correctly.

Question 15

Explain P60 form used in Paye Tax

Answer 15

Form is given to every employee at end of tax year by employer
Details of how much gross income was earned and what tax and PRSI was deducted in that year.
Taxpayer has a statutory right
Used to claim a refund from the Revenue or as evidence that enough PRSI has been paid to claim social welfare.

Question 16

Explain P21 form used in Paye Tax

Answer 16

Given at end of year shows difference between how much tax was paid that year and how much that was actually owed that year.
If an employee has overpaid they are due a refund from Revenue.
If an employee has underpaid they must pay the money they owe back to the Revenue.

Question 17

What is another name for the P21?

Answer 17

Balancing Statement

Question 18

Explain P12A form used in Paye Tax

Answer 18

Filled out when person starts working for first time
The Revenue uses this form to calculate a person’s tax credits and their rate of tax
If not filled out before work started, person is emergency taxed and will pay more tax on wages than they need to

Question 19

What is VAT for household

Answer 19

VAT is a tax on goods and services and is a regressive tax.
Shop owner adds % of price of good to good’s price and customer pays total in. VAT
Four rates of VAT depending on the nature of the good or service. (0%, 9%, 13.5% and 23%.)
Not charged on essentials- education, funeral, medicines, children’s clothing

Question 20

What is Capital gains tax

Answer 20

Tax paid on profits from sale of asset (e.g shares, investment properties).
Individual must work out the CGT they owe and pay it to the Revenue by certain date.
If not paid- interest and penalities
Annual exemption – a small amount of profit on sale of assets is exempt from CGT.
Not paid on the sale of a family home.

Question 21

What does CGT stand for

Answer 21

Capital gains tax

Question 22

What does CAT stand for

Answer 22

Capital acquisitions tax

Question 23

What is Capital acquisitions tax

Answer 23

CAT - tax paid on value of a gift or inheritance.
Certain amount of gifts/inheritance is tax free and CAT not have to be paid.
Gifts / Inheritances between spouses – no CAT is paid.
Between child and parent – no CAT is paid up to a certain amount but after full CAT must be paid
Individuals calculate their own CAT and pay it over to the Revenue by certain date

Question 24

What is deposit interest retention tax

Answer 24

Tax paid on interest earned on savings in savings account.
Bank or financial institution where savings are held deduct DIRT at source and pay it to the Revenue.
The amount an individual receives is the Interest minus the DIRT (net interest).

Question 25

What does DIRT stand for

Answer 25

Deposit interest retention tax

Question 26

What is motor tax for household/business

Answer 26

Any household with a car must pay motor tax.
Paid to the local county council.
Before 2008 – motor tax is calculated on size of the car’s engine.
Now calculated on car’s CO2 emission levels
Must display tax disc on car as evidence tax is paid

Question 27

Name 7 taxes paid by a business

Answer 27

Self-Assessment Income Tax
Corporation Tax
Value Added Tax (VAT)
Commercial Rates
Customs Duties
Employer’s PRSI
Motor Tax

Question 28

Explain self assessment income tax

Answer 28

Paid by self-employed.
Paid on their business profits and the income they received from them.
Individual must work out the tax they owe and file a tax return to the Revenue by the 31st October each year (for previous years earnings)
Self-employed people are subject to audits by Revenue

Question 29

Explain corporation tax

Answer 29

The tax companies pay on their annual profits.
Current rate Ireland: 12.5% - very low compared with other countries.
Companies must calculate their own corporation tax and file their tax returns with the Revenue.
Companies may be subject to Revenue audits

Question 30

Explain VAT for business

Answer 30

Pay VAT on goods and services that they buy.
Businesses get a refund of the VAT they have paid.
Also collect VAT on behalf of government on the goods and services they sell and then pay this to government
VAT added to price of products/services

Question 31

Explain commercial rates

Answer 31

Tax that businesses must pay to their local council every year.
Amount of tax paid is based on the value of the businesses premises.
Value is location, size and nature of business
Goes towards funding the local council’s activities (e.g building roads)

Question 32

Explain custom duties

Answer 32

Tax paid on goods imported to Ireland by business from a non-EU country.
Calculated as percentage of the value of the goods.
The goods will not be released to business by customs until the custom duty is paid

Question 33

Explain employer’s PRSI

Answer 33

Must pay PRSI for all of the people they employ.
Separate to household PRSI
Money is not taken from employee’s wages – it is paid out of the businesses profits.
Calculated as % of employee’s wages
Current rate is: 10.95%

Question 34

What are the effects of taxation on a business

Answer 34

Lower Profits
Lower Sales
Higher Costs
Less Overtime

Question 35

Explain the similarities between household and business taxation

Answer 35

Must register with Revenue for tax purposes- form detailing name,address,sources of income,claims for tax credits/deductions
Both must calculate amount of tax owed and pay it to Revenue on time e.g CGT CAT- All businesses taxes, also subject to penalties/interest.
Both try minimise tax liability - take advantage of government incentives ex: household pension scheme for tax deduction. Lower corporation tax lower than rate of self assessment
Both must keep proper tax records for at least 6 years - claiming tax credit/deduction must have proof they are eligible

Question 36

Explain the differences between household and business taxation

Answer 36

Businesses get more tax deductions than households- Can claim tax deduction for cost of buying fixed assets (reducing tax they owe)
Businesses can claim a refund on VAT from revenue paid on business purchases. Households cannot.
Businesses collect taxes on behalf of the Revenue
Businesses pay more taxes than households

Question 37

Explain progressive tax

Answer 37

Effects those on higher wages more than lower wages

Question 38

Explain regressive tax

Answer 38

Affect people on lower incomes harder

Question 39

Explain tax evasion

Answer 39

Taxpayers deliberately fail to pay correct tax they owe by not declaring full amount of their income or claiming tax deductions they are not entitled to.
Illegal- government has heavy penalties

Question 40

Explain Tax avoidance

Answer 40

Taxpayers take advantage of rules in tax law to reduce tax they owe
Legal
Ex: High income earners lower their tax bill by investing in certain Irish businesses

Question 41

Explain Lower profits as an effect of taxation on Business

Answer 41

Taxes taken from business profits reduce profit left for business to expanding the business
Taxes make it harder for businesses to grow
Ex: taxes taken from profits (self assessment tax and corporation tax)

Question 42

Explain Lower Sales as an effect of taxation on Business

Answer 42

VAT is added to price of many products and services a business sells- making them more expensive
Customers buy fewer products
Lower sales

Question 43

Explain Higher costs as an effect of taxation on Business

Answer 43

Businesses have to work out lots of taxes and pay them to Revenue.
Many business people hire accountant with complicated taxes- fees increase business costs
Employer’s PRSI is added cost as it is money directly from business

Question 44

Explain Less overtime as an effect of taxation on Business

Answer 44

High taxes act as disincentive for employees to do overtime
Government take over half gross wages in tax
Employees feel overtime not worth it
Business left short of workers in busy times