Over the last few months I have written articles about how one sets oneself up in business as a Sole Trader. In ‘Taxing The Man’ I showed how if one is claiming jobseekers allowance it is possible to still earn money legitimately, not lose any entitlements, and use your recouped VAT to pay your annual PRSI.
In ‘the VAT Man’ I gave you a little more information on how VAT works and how you can reduce your tax bill as a working band. Most recently I outlined step by step how to get your business registered and earn legal money whilst legitimately reducing your personal tax bill. Now obviously most of us are pretty angry about rich people who apparently pay no tax because they have clever accountants who help them avoid it, so how do we square this with trying to avoid tax ourselves? Well it’s a good question and I’m glad you asked me…
I’d like to start by stating I believe there is a moral obligation to pay tax in the jurisdiction where one lives and works. Each jurisdiction has it’s own rules about taxation and the Republic of Ireland is no exception. The individual is also usually legally required to comply by the rules, so there is no ambiguity whether one should or not, one simply should pay. This money is used to pay for roads, hospitals and schools – the three essential requirements of our civilisation. However it is also used to pay for the beauracracy which administers these things – which then consists of civil servants (some of whom are essential – doctors, nurses, guards, firemen + teachers) and politicians. Personally I view administrative civil servants and politicians as ‘necessary evil’ rather than ‘essential good’…
Now the people who actually decide the rules are the politicians and senior civil servants, who are mostly lawyers, hence their role as rule-makers, and they make the rules as they see fit because they have a mandate so to do. Obviously these laws have to be agreed by the opposition in the Dail, but the opposition are also lawyers, so there is a certain mindset that they all tend to exhibit. Also political lobbying (not bribery! there are rules you know!) by interest groups means that each rule is phrased in a particular way and has certain conditions or exceptions. It is these conditions and exceptions that allow super-rich people to pay little or no tax, and allow politicians themselves to recieve a DAILY tax-free allowance of €55 per day to pay for food for which they are NOT required to even show any proof of purchase (ie there is nothing to prevent them pocketing the money or fraudulently over-claiming), whilst I am NOT allowed to claim food as a business expense and must pay income tax and VAT upon it. This ‘one rule for you and another rule for me’ inclines me toward a ‘fuck you’ attitude where politicians are concerned. Not to mention smug rich bastards like Bono who preach abolishing world debt, then decline to pay any taxes and expecting ordinary working people to fund the process of doing so.
Unfortunately these are all emotive points which make ZERO case for avoiding tax. But notice it is AVOIDing tax, and not EVADE-ing tax. The latter is illegal, and would rightly see you in prison for ducking your obligation as a citizen to pay tax to the state. Tax AVOIDANCE now is a totally different thing – it is the the legitimate reduction of your tax bill by NOT PAYING TAX THAT YOU AREN’T REQUIRED TO.
‘Hang on a minute Doctor L.Aserboy’ i hear you cry! ‘Tax you aren’t required to pay? Is there such a thing?’
Oh yes indeed I say. You are paying tax on things upon which you need not by law.
‘Am I? Like what?’
Well for starters there’s prescription drugs and bin charges. You pay for those things AFTER you have paid income tax, but they are DEDUCTABLE expenses, so you need not pay ANY tax on them. The fact that many people do not claim this tax back means that the state is constantly absorbing more of your money than is strictly allowed, but will never give it back to you back UNLESS YOU CLAIM IT. If anyone else takes your money and doesn’t give it back until you claim it, it is THEFT and they can go to prison, but apparently this basic rule does not apply to the state quite so strictly. I’m sure they have a special word for it which isn’t ‘theft’ just to make it clearly not illegal, just as the american military has ‘collateral damage’ which is a legitimate accident in wartime and clearly not the murder of innocent people. Anyway, I digress… the bin charges are merely the icing on the cake. There are dozens of things that you can legitimately pay LESS or even NO tax upon if you are just prepared to do the paperwork required to MAKE THE GOVERNMENT GIVE YOU YOUR MONEY BACK.
Ultimately the process of avoidance is simply accepting that the tricky ruling class who make the rules have arranged it so that the majority of suckers pay a lot of tax. A very simple rule of thumb using a typical factory type scenario illustrates how the Revenue soaks up about one third of the GROSS DOMESTIC PRODUCT
You work for your company and generate a turnover of: €100,000
VAT at 21% (remember 21/121=17.35%): €17,355
they pay you: €40,000
take out pension payments of 4k per anum: €36,000
and pay your income tax (deducting 4k tax credit): €6,000
so you get: €30,000
+ spend all your money giving the VAT man another 21%: €6,300
TAXMAN TAKE SO FAR: €29,655 (which amounts to 30%)
Obviously this is a huge simplification, but people spend there whole lives studying the real thing in detail and NO-ONE knows how it all actually works, so ANY information you get about it is an approximation to the real thing. Anyhoo, as you can see the tax man takes a lot of money, in this simple model he is absorbing a full thirty percent of all the money generated by the real economy. And i forgot to include the corporation tax and income tax deducted from the 39,000 left after you got paid…
What is the Actual figure? Noone really knows. Probably not even the Ministry of Finance, because they’ve hocked the country so much they have no real idea how much they owe, and they’re borrowing so much every DAY to pay for their bloated bureaucracy that an upswing in the worlds ever changing interest rates could bankrupt us very easily. Ultimately we are paying A LOT for the wasteful systems of the state imposed by a ruling elite who administer YOUR money. They take as much as they can and make it as hard as possible for us to take back money they are not legally entitled to. So I say screw him, let him work out how to make less money go farther and reduce your tax bill as much as you can. The lowest you can probably hope for is to get your personal tax expenditure down to about 10% (I haven’t done the sums yet so that’s a pure guesstimate), but I’m sure you’ll agree that you would spend that 15% a lot better than the minister for finance. And it does belong to you. After all, You earned it.
Do I sound angry? Okay i definitely sound angry… calm…breathe…calm…centre…
The bottom line is the government soaks up alot of our money one way or another, and most people are probably over-paying tax. What I advocate is ONLY PAYING WHAT YOU ARE REQUIRED TO AND NOT A PENNY MORE. After all, charitable contributions are tax deductable too.
(Just in case you’re wondering all of my information comes direct from the Revenue, the revenue online system ROS, the welfare office and Cork City Enteprise Board and is freely available so I can guarantee that at the time of writing this is all good stuff)
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