Company Directors – Taxation Issues

The duties and responsibilities of company directors for taxation purposes is a complex area and this is only a brief summary of some of the issues that should be considered. It is not intended to be a comprehensive guide.

Chargeable person

Section 950 TCA 1997 confirms that, in general, a director is a ‘chargeable person’ for income tax purposes.  Consequently, a director is obliged to submit an Irish Income Tax Return each year, notwithstanding the fact that all of his/her income may have been taxed at source under the PAYE system.

There are some exceptions, for example unpaid directors and non-proprietary directors are usually excluded from the obligation to submit an Income Tax Return. (A proprietary director is, in simple terms, a director who controls 15% or more of the company).

Incidentally, the Employee Tax Credit granted to employees is not available in respect of any salary paid by the company to a proprietary director (or, subject to certain exceptions, to salaries paid to any member of his family).

It should be noted that the usual 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 any deduction for PAYE deducted from his salary from the company.  Therefore, it is not uncommon for a surcharge to arise to a director even though no income tax would have been payable on filing the return for that period.

Directors’ PRSI

Unfortunately, there are no specific provisions under the Social Welfare Acts which deal with the insurability of company directors. Consequently, the PRSI treatment of directors has been established through practice over the years.  It should be noted that there are no special rules for directors regarding levies and the standard rules are applied to everyone.

There is a difference between a director’s fees and remuneration paid to him.  A director’s fees are paid to a director in respect of duties performed by him solely in his capacity as a director of the company.  A director’s fees will always be insurable under the S1 rate (in effect the fees will always be treated as self-employed income in the hands of the director).

If the director is an employee of the company (i.e. if he has a contract of service with the company) then the director’s salary will normally be insurable under Class ‘A’ and the director will be treated as ‘an employed contributor’.

However where the director has a controlling interest in the company he cannot be treated as ‘an employed contributor’ for PRSI purposes on any amounts he receives from the company, even if he receives a salary. All amounts paid to the director will be insurable under Class ‘S’, i.e. he will be treated as ‘a self employed contributor’.

As there are no specific provisions for directors in the Social Welfare Acts, no definition of what constitutes a “controlling interest” exists. Obviously, if a director controls more than 50% of the voting shares of the company then he would be treated as having a controlling interest in the company. Each situation must be looked at individually and judged on its own merits.

A person is deemed to have a controlling interest in the company if, in effect, that person makes the decisions for the company as to what work it will carry out and the method it will use to carry out this  work. For example, in a situation where the company is owned between a father, a mother and two children, each owning 25%, all four could be deemed to have a controlling interest in the company.

Contrast this with the situation where a company is owned by two unconnected parties, Director X – 49% and Director Y – 51%. As a 51% shareholder, Y will be treated as ‘a self-employed contributor’ and insurable under Class S. However X does not have a controlling interest and therefore will be insurable under Class A as ‘an employed contributor’.

Where the director is treated as a self-employed contributor and insurable under Class S, Employers’ PRSI is not applicable to his salary.

As you can see, establishing the correct PRSI class can be tricky and, if in doubt, it is advisable to apply to the ‘Scope Section’ of the Department of Social, Community & Family Affairs for clarification. Before making a decision, an officer from this section will review the circumstances thoroughly and will usually visit the company’s premises.

Duties and responsibilities

Director’s have many duties and obligations, especially where a director is also performing the duties of the company secretary. While this is primarily a company law issue, tax law also imposes various responsibilities and provides for various penalties to be levied where these duties are not met.

In particular, penalties can be imposed on the company secretary where the company fails to submit appropriate returns or submits a fraudulent or incorrect return. These penalties are in addition to any interest or penalties levied on the company.

Details to be provided by new companies

Section 882 TCA 1997 requires the company secretary of a new company to supply certain information to the Revenue Commissioners. Failure to comply can lead to the company being struck off and/or penalties can be imposed both on the company and the company secretary.

In general, this information must be submitted within 30 days of the company commencing to trade. However, sometimes the Revenue Commissioners will request this information (e.g. by issuing a Form 11F CRO). In addition, the Revenue Commissioners must be informed of any major change in the information previously provided within 30 days of such a change.

The information that must be provided includes the following:

  • Name of the company.
  • Address of both the company’s registered office and, if different, its trading address.
  • Name and address of company secretary.
  • Date of commencement of the company’s trade, profession or business.
  • The nature of this trade, profession or business.
  • The date to which accounts will be made up.

In addition to the above, further information may be requested by the Revenue Commissioners. It should also be noted that additional information must be provided by non-resident companies, including for example confirmation of where the company is tax resident.

In practice, the above information is provided by the company in a Form TR2 when registering for tax purposes.  Occasionally, the Revenue Commissioners will issue a request for the above details in the form of a Form 11F CRO.  This usually occurs where there is a period of time between the incorporation of a new company and the commencement of its trade because the Revenue Commissioners will have a record of the new company but will not have received the TR2.

.

Related Article:           Research and Development Tax Credit

NEXT STEP:

Please call Noel Murphy today on 021-4310266 if you require further information on company directors – taxation issues or to arrange a free consultation.