Tax Implications of being a Company Director
Being a company director and especially a proprietary director entails a lot more than just the legal obligations set out in the Companies Acts as there are also many onerous taxation rules that only apply to directors.
Self-Assessment Tax Status
In most circumstances a company director is a ‘chargeable person’ and must comply with the self-assessment regime for income tax purposes and is obliged to submit an income tax return each year, regardless of the fact that all of his/her income may have been taxed at source under the PAYE system. If the self- assessment rules are not adhered to, the director may be exposed to statutory interest which is currently approximately 8% per annum and surcharges of up to 10% for late submissions.
There are some exceptions; for example unpaid directors and non-proprietary directors (owns or controls less than 15% of the shares of the company) are usually not obliged to file an annual income tax return.
It is important to note that the late surcharge penalties will apply even though no extra income tax may be due for the tax year in question!
PAYE on Company Director salaries
Even though the salaries are taxed through the payroll systems, a proprietary company director and a spouse who is employed in the company are not allowed claim the PAYE Tax Credit. This exclusion also applies to their children unless they work in a full-time role in the company.
Extra attention needs to be exercised by a proprietary company director when completing his/her annual income tax return as they may only claim a credit for the tax deducted from their salary if all the company’s payroll taxes for that year of assessment have been paid. This is particularly relevant for the company director of a business in financial difficulty, as Revenue can issue an income tax assessment on the company director without giving any credit for the PAYE that they may have suffered at source if it is unpaid by the company.
Until recently there were no rules to deal with the social insurability of a company director. The new rules state that a director who has a 50% shareholding will be treated as insurable under Class S (self- employed) for PRSI purposes. The insurability of a company director who owns or controls less than 50% of the shareholding of the company will continue to be determined on a case by case basis taking into account the Code of Practice for Determining the Employment or Self-employment Status of Individuals.
Where an individual is classified under Class A (employee), 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.
Other Company Director Transactions
In addition to many legal issues there are also numerous tax implications that impact on the following classes of transactions between a director and a company:
- Buying and selling of assets
- Borrowing and lending
Due to the fact that in Ireland the majority of directors are also shareholders in the same company the Revenue Commissioners deem them to be “connected party” transactions and have a special rules related to them are too detailed for this blog and so I will return to these in a follow up piece.
It is critical to be aware of the tax consequences and responsibilities that stem from an appointment as a company director. The taxation treatment of a company director can be somewhat confusing and expert tax advice should always be obtained before accepting an appointment.
It is also worth bearing in mind that the concept of limited liability is not fully extended to a proprietary company director as he/she may be held personally liable for their company’s arrears of unpaid PAYE attributable to their own remuneration.
For more information on our tax services please contact us on 01-5175211 or firstname.lastname@example.org. We are a firm of Chartered Accountants based in Sandyford, Dublin 18 specialising in helping SME’s with all their tax and accounting needs.
About the author
Rob is a Fellow of the Institute of Chartered Accountants Ireland, a Certified Fraud Examiner, and also a Xero Certified Advisor. With over 25 years professional and business experience in both the SME and Not for profit sectors, he is the trusted advisor of many clients across numerous sectors. Loves all things business, otherwise it’s a game of golf, running the odd marathon and still believing next year will be Liverpool’s year! #YNWA!