Sun | Jul 15, 2018

Everald Dewar | Growing pains over tax returns

Published:Friday | March 10, 2017 | 12:00 AM
Everald Dewar

As the date of the assassination of Julius Caesar, the Ides of March, approaches it is coming more and more to light that the new form for the filing of taxes for self-employed individuals - the SO4 - has misfired.

Something has gone egregiously wrong.

One accountant was quick to point out that 'alimony' is now taxable, when it was never included on the form before. He was extremely perturbed.

His salvation came when advised that the spouse paying alimony should be able to get a tax deduction.

But there is more to the SO4 than marriage, acrimony or alimony, and one must not joke about this individual tax return at all.

One must be serious and sober about it. It must be respected as a dangerous foe and not to be trifled with by persons who are ignorant of the tax rules. It must be handled by an expert.

Once you engage the services of a counterfeit 'expert', then problems are already at work in your tax life.

The new SO4 form was designed to take into account the various amendments to the tax laws, including the 30 per cent tax rate on individuals earning greater than $6 million. It also captures other statutory payments that must be made by the individual: NIS, NHT contributions and education tax.

As the Trinidadians would say, this is where the bacchanal begins, causing much vexatious and cantankerous reactions that are outside the scope of this column.

Employed vs self-employed

To use the SO4 form, your employment status must first be determined. It is generally accepted that for many proprietor, the most tax-efficient way of carrying on business is through a company. However, for many small businesses, the additional cost of running a company can make incorporation a less attractive proposition.

Associated costs of incorporation are many and the arguments for and against running a business through a corporate entity are well-rehearsed and cover issues wider than tax bills.

Based on the trends taking place in the business world today, some individuals will not find it easy to determine whether their contracts fall under employed or self-employment as the boundaries are ill-defined.

Some professionals' contracts are muddled. There are situations where a person leaves their workplace on Friday evening and returns Monday morning as a subcontractor through their own service company.

Law amended

Perhaps readers are nodding in agreement, as we know many are in this category.

This is the type of body language the Tax Administration Jamaica (TAJ) loves and will soon send out notices calling in the particular readers for questioning it could be risky business reading this column.

The law was amended in 1996 to withhold tax from the service companies and individuals, on the proposition that individuals cannot choose their own definition of whether they are employed or self-employed.

Notwithstanding, it is case law that shapes and determines the test for the distinction between employment and self-employment.

An individual may be in employment but have a series of engagements with clients in different parts of the Island. Each such engagement is a separate employment and is best treated as contract for services and hence self-employed.

In fact, one can be wearing both hats at the same time and hence must file a SO4 tax return.

Schedule C on the form must be completed as it helps to determine whether you will be subjected to the 30 per cent tax rate. It divides the year in two parts and only where your taxable income for the last six months exceeds $6 million will the 30 per cent apply for 2016. Remember, also, that the effective threshold for 2016 is $796,536 and not $1.5 million.

The other aspects of the tax return depict a more complicated approach than would be expected for a typical one-man band business.

The whole thing is stained in controversy I have seen persons brought to tears, and wrath, over their returns.

If you get it wrong, the Revenue Administration Information System (RAiS) will make corrections and punish the godly just as much as the ungodly.

Although RAiS was set up to tackle particular forms of tax avoidance, it will create a bureaucratic nightmare after March 15. Let's hope it gives cause to revolutionise how tax legislation is drafted in the future.

- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.