19 May 2022

An important reminder for businesses availing of tax debt warehousing and for business owners generally.

Summary

If your company has not passed on the tax collected from your salary on your behalf to Revenue and it has been warehoused by your company with Revenue then YOU could become personally liable for paying it until the warehoused debt has been paid in full.

Reference to ‘ claiming credits’ etc below may not be fully understood and read as ‘accountants speak’ so the implications may not register fully with people so hence the stark message above.

Pay the Revenue (PAYE) first

A phrase people may often hear is to “pay yourself first” which refers to putting a specified amount from your monthly net salary into a savings or investment account before you do any other monthly living or discretionary spending. In doing this you prioritise your long term financial well-being.

For tax debt warehousing, it is a requirement to maintain current taxes. So when paying down any tax debt warehoused business owners should “pay the PAYE first” before other taxes to minimise the impact of section 997A on themselves personally.   

Section 997A TCA 1997

The purpose of Section 997A is to deny certain directors and employees a credit for tax deducted from their salary until such tax has been remitted to the Collector-General by the business.

It applies to directors or employees who have a material interest ( > 15% shareholding) in the company that pays emoluments to the director or employee.  A material interest is considered either in their own right or with one or more “connected” persons. A person is connected with an individual if that person is the individual’s husband, wife or civil partner, or is a relative (brother, sister, ancestor or lineal descendant), or the husband, wife or civil partner of a relative, of the individual or of the individual’s husband, wife or civil partner”. So it is possible that a person affected by this provision may not hold any shareholding in a company.

Debt Warehousing

In the past the impact of section 997A was seen in circumstances where a company went into liquidation.

In more recent times with the availability of the Revenue Tax Debt Warehousing Covid Support Scheme, the crude impact of section 997A has reared its head for a wider audience. If an employer is availing of debt warehousing for PAYE (Employer) liabilities this means than a director or employee could find themselves unable to claim a credit on their personal tax return for PAYE deducted if it has been warehoused and not paid by the employer company.

Revenue allocate PAYE payments to employees who do not have a material interest first so in essence all PAYE warehoused by a company must be paid for the affected director/employee to obtain a credit on their tax return.  

So the impact of this removes to a large extend the benefit for a business owner of the government tax debt warehousing Covid support for a business recovering from the effects of Covid, as they face into the current business environment of higher interest rates, costs and business uncertainty.

2020 Income Tax Warehousing

For the 2020 tax year, there was the possibility at the individual taxpayer level for the self assessed individual to avail of income tax warehousing and warehouse of Schedule E (PAYE) tax liabilities. A self-assessed director or employee in these circumstances (i.e. with a material interest who is not entitled to claim credit for PAYE deducted because it has been warehoused by her/his employer) who was not eligible for income tax warehousing because s/he has not suffered at least a 25% reduction in total income, could avail of income tax warehousing but only in respect of her/his Schedule E liabilities.

2021 Tax Return

The 2021 income tax return issued by Revenue reminds taxpayers in the PAYE section that “Note: In respect of Proprietary Directorships, only tax remitted to Revenue should be entered here.” when entering an amount for PAYE deducted in the employment.

The filing deadline for 2021 tax returns is 31 October 2022 which extends to 16 November 2022 where the return is filed and appropriate payments made through ROS for the 2021 income tax balance and preliminary tax for 2022. In the absence of a credit for PAYE deducted from salary this could crystallise a significant liability personally to Revenue in 6  months time. Ultimately when the company discharges any PAYE tax debt warehoused the Revenue will provide a credit to the individual affected but in the meantime they will have been impacted personally from a cashflow viewpoint and from an interest exposure if they do not pay the balance of tax personally due when due. Also if their return is filed after 31 October 2022 they would be exposed to late filing surcharge (or between 5% and 10% of their tax liability, calculated before credit for PAYE deducted).

Where an income tax return (Form 11) is filed for an individual who is subject to section 997A but does not meet the conditions to qualify for income tax debt warehousing, an income tax liability potentially could immediately crystalise on filing the return where that individual’s PAYE is warehoused by their employer.

Revenue have not yet announced any income tax debt warehousing for affected individuals for their 2021 tax returns where their employers continue to have PAYE tax warehoused. Lobbying is ongoing for the various professional bodies but to date no certainly has been provided. This is a disappointing situation that business owners find themselves in.

Phased payment arrangement

In the absence of any income tax debt warehousing, individuals may be able to avail of a phased payment arrangement with Revenue but this would involve an application to revenue, downpayment (circa 20%), instalments (maximum 36 month period)  and interest (8%).

Conclusion

A reminder to business owners to prioritise PAYE payments over other taxes and would suggest that businesses that choose to pay off balances which have been debt warehoused would pay PAYE first.

And for business owners who are not availing of tax debt warehousing, they should still consider making PAYE payments before other taxes as PAYE is the tax which has a potential for a personal sting in the tail.

Disclaimer :

Whilst every effort has been made to ensure the accuracy of matters covered by this article, no responsibility for loss or damage occasioned by any person acting, or refraining from acting, as a result of matters above. Professional advice should always be sought before acting on any interpretation of matters covered by this article.