Hello from Sunny Tramore. It’s only delightful to see the sun shining through the window when I extract myself from the bed. The small slivers of bright sunshine make that difficult task a bit easier. After a bowl of Flahavan’s finest, it’s on to the laptop for my Friday morning routine of writing this blog.
My running is improving only because I was starting from a very low base. I have set my sights on the Waterford half marathon once my dodgy ankle behaves itself. I won’t tempt fate yet by booking it. The arrival of a book on a training method has given me a boost. Ross O’Carroll Kelly and his dysfunctional family are waiting in the wings to feel the love again. The hills are becoming a bit easier. I even managed the climb from the Vic to my local Centra, via the Japanese gardens, without stopping. Although I had a few sympathetic glances from passersby feeling sorry for the slowcoach.
Enough of my ramblings! Last week we looked at Part 11 of our Tax Tips series when renting out property. In case you missed it See here
This week we are going to look at a subject on which we did some internal training recently. We were doing some of our company director’s Income Tax returns for 2020 and saw that there are issues. The issues arose where their companies had availed of Tax debt warehousing for 2020.
What Issues?
Revenue introduced Tax debt warehousing in mid-2020 for Vat and PAYE liabilities. Later in the year, overpayments of the TWSS could also avail of warehousing. The main aim of this scheme was to help businesses keep cash flow to meet other business costs. These tax debts can be parked for 12 months after a business recommences trading at 0% interest. After 12 months the business can repay the tax debt or pay the debt over a period at a reduced interest rate of 3%. For more info on Debt warehousing scroll to end of page
The issue for the company director is when their company is using debt warehousing for PAYE. The reason it is an issue is tax law doesn’t allow a company director credit for unpaid PAYE. For clarity, when we say company director, we are talking about a director that owns 15% or more of the company. If such a company director files their Income Tax return for 2020, they won’t get a credit for the PAYE deducted.
Paddy Fonseca owns 100% of a jewellery company called Charming Enterprises Ltd. The company closed for large parts of 2020 due to public health guidelines and had limited sales. The company has 6 employees and availed of debt warehousing for Vat & PAYE. For 2020 Paddy’s salary was €50,000 on which PAYE of €7,840 was deducted. Paddy decides to file his own tax return on ROS for 2020, as there’s nothing in it. He is expecting to get a small refund of €200 as he claimed €1000 of medical expenses. To his surprise and shock his Notice of assessment issues from Revenue and he has a tax liability of €7,640. He thinks there must be some mistake and he calls a lovely lady in Revenue called Mary. Mary tells him about this rule and confirms that the assessment is correct, and he must pay this within 30 days. Young Fonseca is pulling his already thinning hair out as he knows he hasn’t got the cash to pay this liability.
Another sting in the tail!
The law talks about having a material interest and material is 15% or more. A director or employee can have a material interest in one of two ways;
- in his or her own right, or
- with one or more connected persons
Let’s assume that Paddy’s father Freddie works for Charming Enterprises Ltd too. His dad doesn’t own any shares but because he is connected to Paddy he is deemed to have a material interest. Freddie is subject to the same rule as Paddy, in that he won’t get a credit for the PAYE deducted from his salary. The definition of connected is wide-ranging. A director or employee is connected to
- his/her spouse
- his/her civil partner
- a relative,
- a relative of the individual’s spouse or civil partner
- the spouse/civil partner of a relative, and
- the spouse or civil partner of a relative of the director or employee’s spouse or civil partner
As I said wide-ranging! If Freddie’s only income is his salary, and he doesn’t file a tax return then it won’t affect him. He doesn’t have to file a tax return because he doesn’t own 15% or more of the company. If he has other income, like rental income, he would have to file a return and wouldn’t get credit for PAYE deducted. But how many family companies are out there that are husband and wife teams? And they could have children involved too. Anyone who owns 15% or more of the company must file a tax return as they are in the self-assessment system.
In a husband and wife scenario or both civil partners work for the same company and one person owns 15%. None of the spouses or civil partners would get credit for the PAYE deducted. This is a bit of a nightmare for the director, employees, and shareholders caught by this rule.
One of our clients is a father and daughter-owned company. The spouses of both work for the company as does the father’s sister. They have availed of debt warehousing and we do the Income Tax returns for both. So, 5 people in the same company will be caught by this provision.
What taxes apply?
The taxes that apply are anything deducted under the PAYE system. So, it will include Income Tax, USC, PRSI, and Local Property Tax.
What happens when some PAYE is paid?
What happens when some tax deducted from employees’ or directors’ salaries has been paid to Revenue? Revenue treats this, in the first instance, as coming from the earnings of directors or employees that don’t have a material interest. If we look at Paddy and Freddie again and assume the PAYE taxes deducted from the other employees came to €20,000. A summary would look like this
| Director/Employees | Salary | Tax deducted |
| Paddy | €50,000 | €7,840 |
| Freddie | €20,000 | €2,160 |
| Employees | €100,000 | €20,000 |
| Total | €170,000 | €30,000 |
The company paid Revenue €22,000 PAYE for 2020.
In this scenario, €20,000 of the €22,000 will go against the taxes of the employees that don’t have a material interest. The credit for Paddy and Freddie of the €2,000 PAYE is as follows
| Director | Tax Apportion | Credit |
| Paddy | €2,000 x €50,000/€70,000 | €1,429 |
| Freddie | €2,000 x €20,000/€70,000 | €571 |
It could be that the company paid less than €20,000 in PAYE or paid no PAYE at all in 2020. Employees, with no material interest, will still be entitled to full credit for tax deducted from their earnings. So, in our example, those employees that earned €100,000 will get full credit for the €20,000 deducted, if some or none of it is paid.
What to do?
The above situation is a headache for the directors, their advisors, and Revenue. Revenue realise this problem and are due to issue guidance on this shortly. This guidance was due at the end of March and, owing to the complexities, we are still waiting. We would caution filing your Income Tax return before the guidance issues. Many companies will have funds set aside to pay the PAYE & Vat that they have warehoused. Because of the above, we would think it prudent to pay the PAYE before Vat, if limited funds are available. Revenue has confirmed that you can do this. Warehousing of these tax debts will run into 2021 too, so the priority, for now, will be 2020 PAYE liability.
Summary
The above is to make you aware of this situation. If you haven’t availed of Debt warehousing for PAYE, then there is no issue. There can be all sorts of problems like Preliminary tax for 2021 if you have a liability for 2020. Also, what happens if you file your Income Tax return, pay the liability and the company pays the PAYE later in the year. You will need good advice on this so stay in touch with your advisor.
Interested in talking to us? Call Deirdre on 051396703 or start here. Tell us a bit about you and how we can help.
