Knowing your tax and pension liabilities is key to the successful running of a firm, writes John Downes.

The question of tax and/or pension provision is hardly the first thing that comes to the minds of budding entrepreneurs as they start building their own business.

Caught up in plans for world domination - or at least significant success - few want to get bogged down in the more prosaic intricacies of tax returns and Pay Related Social Insurance (PRSI) contributions.

Yet running a successful business requires an ability to ensure that you and, to a lesser extent, your employees are tax compliant. Indeed, there can be severe penalties for those who ignore this fact, according to Mr Bernard King of the Revenue Commissioners, which collects taxes and duties on behalf of the Government here.

"The first question for anybody starting out is: 'Am I going to be self-employed or a limited company?'" he says. Once you have decided how you want to classify your business, it is important to consider registering for Value Added Tax (VAT).

According to Mr King, if your business supplies goods, the turnover threshold above which you are obliged to charge VAT on any goods you supply to customers is approximately €51,000; for those providing services, it is around €25,500.

"I would say that registering VAT is always a good idea," says Mr King. "We will send you out a VAT form where you state the VAT you have charged, the VAT you have paid out, and the net amount due either to you or the Revenue."

The next thing to bear in mind is that if you are going to employ someone, you should operate Pay As You Earn (PAYE) and PRSI. To do this, it is necessary to register as an employer.

Failure to operate such a system, by paying your employees their gross wages without tax deductions, could mean you will be held liable for any tax they have not paid. There can be significant penalties for not doing so.

There are also a number of special cases where specific obligations are placed on employers. For example, there is a Professional Services Withholding Tax for professionals working for a Government agency, where such workers will automatically have their tax withheld at source.

Other examples include the Relevant Contracts tax, which often applies to the building and/or forestry trades.

But how would a person just starting out in business go about filing their own tax return, without the expense of involving an accountancy firm?

According to Mr King, businesses should always try to get as much independent professional advice as they can. However, it is possible to file your own accounts online, he points out, through the Revenue's online service. This operates under a principle known as "pay and file", meaning you pay your tax and file your projected returns for the following year on the same day.

Many young people also work part- or full-time while getting their business off the ground. Although they might be paid for this work through the PAYE system, Mr King says they should also register as self-employed individuals, unless their non-PAYE income from their new business is negligible.

"It is important to return all your income, even if most of that income comes from salaried employment," he says.

Pension provision is another consideration for anyone planning future expansion out of a one-person operation. This is particularly true if you are operating in a competitive market and looking to attract the best staff.

Occupational schemes are one common type of pension offered by companies and usually involve companies shopping around until they find a pension provider which they wish to use.

Employers choosing to go down this route must make a "meaningful contribution" in matching the amount of money contributed by employees.

Personal Retirement Savings Accounts, have recently been introduced. These are relatively simple for businesses to set up, and allow greater flexibility for self-employed people and individuals moving between jobs.

The Revenue has a number of guides on starting a new business on www.revenue.ie

Next week: Starting your own business: personal stories