Taxation and company directors
In general, a director is a ‘chargeable person’ for income tax purposes and is obliged to submit an income tax return each year, notwithstanding the fact that all of his/her income may have been taxed at source under the PAYE system. In addition they must comply with the self-assessment regime and may have a requirement to make payments on account to meet their preliminary tax requirements. Where these requirements are not met by the due date, the director is exposed to statutory interest which is calculated at a rate of approximately 8% per annum.
Taxation and company directors
There are some exceptions to this general rule; for example unpaid directors and non-proprietary directors are usually excluded from the obligation to file an annual income tax return. In simple terms “proprietary director” means a director of a company who is the beneficial owner of or is able either directly or indirectly, to control more than 15% of the ordinary share capital of the company.
Late surcharge provisions apply if the director’s income tax return is not submitted by the due date. The surcharge will be either 5% or 10% of the director’s income tax liability for that year before taking account of PAYE deducted from his salary by the company. This may result in a significant monetary penalty for the director even though no income tax may have been payable on filing the return for that period.
Despite salaries being taxed through the payroll systems, proprietary directors and their spouses who work in the company are not granted the PAYE Tax Credit. The exclusion of the PAYE credit is also extended to their children unless they work full-time in the company.
Care also needs to be exercised by proprietary directors when completing their annual income tax returns as proprietary directors may only claim a credit for the PAYE deducted from their salaries if all the company’s payroll taxes for that year of assessment have been paid. This may be of concern particularly for the director of a company in financial difficulty, as Revenue will raise an assessment on the director effectively disregarding any PAYE that they may have suffered at source via the payroll if it is unpaid by the company.
Earned Income Tax Credit
From 2016, the self-employed and working proprietary directors and their working spouses/civil partners will be entitled to an income tax credit against income tax on their earned income. It provides for a maximum tax credit of €950 (€550 for 2016) (computed by reference to the standard rate of income tax) in respect of an individual’s earned income.
Prior to the introduction of the earned income tax credit, proprietary directors did not qualify for the PAYE tax credit that is available to PAYE employees.
Until the publication of the Social Welfare and Pensions (Miscellaneous Provisions) Act 2013 there were no legislative provisions to deal with the insurability of company directors. Following the introduction of this legislation, a director who has a 50% shareholding in the company will be treated as insurable under Class S for PRSI purposes. The classification of proprietary directors who own or control less than 50% of the shareholding of the company will continue to be determined on a case by case basis, taking into consideration the Code of Practice for Determining the Employment or Self-employment Status of Individuals.
Where an individual is classified under Class A, PRSI is payable on their earnings by the employee (4%) and their employer (up to 10.75%). Class A provides them with entitlement to the full range of social insurance benefits including short term benefits in respect of illness, unemployment and maternity as well as long term benefits such as Widow/Widower’s or Surviving Civil Partner’s Pension and State Pension.
Where an individual is classified under Class S, PRSI is payable on their earnings (4%) with no employer element leading to a direct saving for the company of 10.75% on directors’ salaries. Class S provides a director with an entitlement to certain short-term benefits (i.e. maternity benefit) as well as long term benefits such as Widow/Widower's or Surviving Civil Partner’s Pension and State Pension.
Transactions with the company
In addition to company law issues around the acquiring from or disposing of assets to a company, there are tax implications that need to be considered before entering such transactions. Within the owner managed sector in Ireland, in many cases the company shareholders are also directors of the company.
(i) Disposal/acquisition of assets
Tax law imposes market value when computing any tax associated with the movement of assets between director/shareholder and their company with any uplift between the values and consideration passing being subject to income tax, PRSI and USC.
Where a capital loss arises on a transaction between the company and a director, the use of such a loss is restricted and can only be used against a future gain with the same party.
Equally, transactions involving shares in the company may result in an income tax exposure even if they ostensibly appear to be capital in nature.
Where a director borrows money from a close company and the debt is outstanding at year end, the company is required to make a payment to Revenue equal to the amount of the debt outstanding regrossed at the standard rate of tax, which is currently 20%. Upon repayment of the loan by the director, the tax may be reclaimed from Revenue. For example;
Tom, a company director borrows €10,000 from his company on 28 December 2012 and does not repay the loan until 28 December 2013. The company will be required to include as part of any corporate tax liability for 31/12/2012 an additional amount of €2,500 (€10,000 regrossed at 20%). Following repayment of the loan by Tom in December 2013, the company can seek a repayment of the €2,500 paid as part of the tax liability paid in respect of 2012. In addition, Tom will be liable to benefit in kind on the loan amount for the period outstanding.
In the event that the company waives this debt, the amount of the waiver will be assessed as income on the director. The gross sum is treated as part of his total income and a credit is available for the deemed income tax deducted. The income tax paid by the company is no longer recoverable and the write off is not deductible for corporation tax purposes.
Where a director lends money to his company and charges an interest rate on the loan, the receipt of such income is chargeable to income tax. At a corporate level, the interest paid to the director will only qualify for a tax deduction up to the lower of 13% of either the loan amount or the company’s issued capital.