SINCE directors’ PAYE was last dealt with in this publication on 25 January, new PAYE rules applicable to directors of private companies have come into effect from 1 March.
Directors are subject to the controversial new paragraph 11C of the Fourth Schedule. This means they are subject to a harsher regime than the PAYE treatment extended to other employees.
As pointed out previously, paragraph 11C contains certain anti-avoidance rules. This is a strange move since private company directors previously were not subject to PAYE.
Nevertheless, Revenue was apparently concerned that these individuals would somehow manipulate the flow to them of their remuneration so as to postpone the companies’ liability for PAYE as long as possible.
Thus paragraph 11C stipulates that a company must account for PAYE in respect of a deemed monthly amount paid to any private company director. Essentially, this amount is determined using a formula which takes into account the remuneration derived by that individual during the previous year.
This can result in considerable hardship in certain circumstances. The most significant of these is probably where the individual concerned is likely to receive less remuneration during the current year than in the previous year.
Another potentially problematic situation is where the individual receives a significant proportion of his remuneration by way of irregular lump sum payments such as bonuses. In this situation, the PAYE liability could rise significantly in advance of the individual receiving a corresponding amount of remuneration.
On 19 February, Revenue released interpretation note No 5 and a set of operational guidelines explaining how the new paragraph, 11C, is to be applied. This note is helpful in some respects. It clarifies one aspect that was previously unclear, namely the situation where the individual receives significant bonuses relatively early in the tax year.
It was previously not clear whether the company would have been required to deduct PAYE from the bonus already paid to the individual and would also have been expected to continue accounting for PAYE in respect of the artificially inflated deemed amount calculated by reference to the previous year’s remuneration.
The interpretation note indicates that, essentially, what the company is required to do is to compare the actual remuneration paid to the individual with the deemed remuneration on a year to date basis.
For as long as actual remuneration for the year to date exceeds deemed remuneration – for example, because of a large bonus already paid to the individual – the company is required to deduct PAYE only from actual remuneration.
However, should the deemed remuneration for the year to date at any point exceed actual remuneration paid to the individual so far, PAYE must then be accounted for on the deemed remuneration.
It seems that Revenue will be prepared to consider granting relief from paragraph 11C in circumstances where it can be shown that the rules will result in hardship for the individual. There is a tax directive form (IRP 3d) to be used in this situation.
A factual example of the type of situation which Revenue may be prepared to view sympathetically is described as follows: “Business will be closed on 31 December 2002 due to retirement of sole member.”
However, it seems that Revenue will be unmoved by applications based on the fact that the individual receives highly irregular or even highly uncertain remuneration.
It seems that, to be able to demonstrate the degree and type of hardship required for relief, it will be necessary to give reasons for a strong likelihood that the individual concerned will receive less remuneration than in the previous year.
An aspect which remains unclear is precisely who is entitled to claim refunds when too much PAYE is paid by a company because deemed remuneration for a particular year exceeds actual remuneration paid to an individual.
The legislation gives the company the right to recover the full amount of PAYE from the individual, who will then presumably be refunded the excessive PAYE on assessment.
What is not clear is whether the company can elect not to recover the PAYE from the individual but rather apply to Revenue for a refund. In other words, can the company simply issue the individual with an IRP5 based on actual remuneration and actual PAYE and then apply to Revenue for a refund of the excessive amount arising from the higher deemed PAYE for the year?
It is not clear what provision of the Income Tax Act a company would use in this situation to justify claiming the refund.
The interpretation note and guidelines clarify certain important additional points. These include:
• The PAYE paid by the company is not regarded as a loan granted to the director during the period before that amount is recovered.
• Certain rules apply to the treatment of directors’ accrued bonuses which are determined only in the subsequent year of assessment.
• Remuneration paid to a private company director will be subject to the skills development levy. However, the levy should be calculated by reference to actual, not deemed, remuneration.
• No application for a hardship directive will be considered unless the director’s tax affairs are in order. This means that all returns and provisional tax returns must have been submitted or must be outstanding in terms of a valid extension. All taxes must have been paid in full or arrangements must have been made for the payment of outstanding taxes.
It will be interesting to see how these new rules operate in practice. Revenue may well find itself besieged with applications for directives.
Billy Joubert
Tax Partner at Deloitte & Touche