The prospective deduction at source for income tax in France next year will also impact on small business owners.
Although impacting primarily on salaried individuals, the introduction of deduction at source of income tax in 2019 will affect everyone to some degree, including those who run a business in France.
Micro-entrepreneurs pay income tax on the basis of their turnover, but as this figure cannot be known in real time by the tax office, the deduction at source will be based on the tax return from your previous year, in the form of a withholding tax.
That means that you will pay income tax each month (or quarter) in 2019 on your 2017 income tax as given in your 2018 tax return!
At least, you will do so for the first part of the year, for after submission of your tax return in 2019 on your 2018 income, in September of 2019 the deduction at source will be changed to reflect any differences in income that have arisen.
The same will happen in future years, so that in September 2020 the deduction at source will be updated to reflect any changes in income that occurred in 2019, with the taxpayer asked to pay more or given a tax refund.
In all of this it is important to note that the income tax payable in 2019 will be a withholding tax for your income earned in 2019, as due to the introduction of taxation at source income tax due on 2018 will not be payable. A tax credit will be granted for all tax that may have been paid in the year.
The deduction at source will be made on the 15th of every month, commencing 15th January 2019.
If you would prefer that the payment of income tax was made on a quarterly basis, then you can opt to do so on-line through your micro-entrepreneur account with URSSAF, the social security contributions collection agency. The first deduction would be 15th Feb and quarterly thereafter.
The amount of the deduction will reflect your income from all sources, such as pension and investment income. The tax due from these different sources will be brought together in a single deduction.
The tax return that you will have received in autumn this year explains the planned deductions for 2019, for each type of income, and the total amount that will be deducted each month.
You can change the amount of the deduction each month if there is a significant change in your turnover.
However, you need to be careful about doing so, as if you make a major change to the amount payable, which later results in you paying a lot less in tax that the amount you owe you could face penalties.
Although the income tax calculation for micro-entrepreneurs is based on turnover, a fixed cost allowance is granted before tax is determined. This allowance varies by type of business, from 34% to 71%. So the tax payable is based on turnover less the allowance.
Whilst most micro-entrepreneurs will face this change, it will not apply to all of them.
Those who have opted to pay income tax each month alongside their social security contributions will not be affected by the change.
These micro-entrepreneurs are those who have elected to be taxed on the basis of 'micro-fiscal' (also called 'prélèvement libératoire'), under which a small fixed percentage of income tax is payable each month on total turnover. Under this system there is no cost allowance as there is with income tax.
One of the malign effects of the introduction of deduction at source is that those who have elected for the micro-fiscal in 2018 will not be granted a tax-free year in the same manner as other taxpayers. The lack of equal treatment is one that has caused a great deal of controversy and resentment.
If you are a new business without a previous tax record for the business you have three options:
- You can opt for the micro-fiscal and pay as you go on your turnover;
- You can elect to pay an amount each month without adopting micro-fiscal, or
- You can simply do nothing and wait until you make your tax return the following year.
There are new tax breaks and other changes for micro-entrepreneurs starting in 2019, which we will cover in a future article.