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Personal taxation: is the denial of PAYE credit over the top? Back  
The denial to certain directors and employees of credit for PAYE deducted from their remuneration is so widely drafted in the Finance Act that it may well be unconstitutional writes Robert Dowley in this month's KPMG Tax Monitor. And not only that, but It may well also be in breach of the Human Rights Act. However, he adds that the affected directors and employees, are unlikely to be able to afford the luxury of a trip to the High Court or the Supreme Court to establish that decision.
Credit for PAYE
The Finance Act denies to certain directors and employees credit for PAYE deducted from their remuneration by their employer company, but not remitted to the Revenue by the company. For some unexplained reason, this treatment is applied only where the employer is a company, and not where it is a partnership, or an individual.

Robert Dowley, partner, KPMG

The section has spread its net incredibly wide in identifying the directors and employees who are to be denied credit. It extends to any employee or director who controls more than 15p.c. of the ordinary share capital of a company on their own or taking the holdings of all persons connected with them also into account or where they are regarded as controlling the shares not because they have any control over them, but because persons connected with them alone have control over them.

To give examples of how wide this net is, a man working for a company as a security guard on the gate to their premises could be denied credit for the PAYE deducted from his salary (if not remitted by the company to the Revenue) because the husband of one of his grand-daughters holds 16p.c. of the share in the company in question. He might also be denied the credit in relation to unremitted PAYE where 16p.c. of the share capital is held by a sister-in-law of his wife.

The new section, s997A, is misleadingly entitled “Tax credit in respect of tax deducted from emoluments of certain directors”. It applies to people who are not directors but who are only employees.

Subsection 2 states that the denial of a credit is in respect of persons who have “a material interest in the company”. As demonstrated above, the credit can be denied to persons with no interest in the company whatever, no ability to influence the affairs of the company, and no right to any knowledge about its financial affairs.

It might be thought that such penal legislation would be employed to counter criminal fraud on behalf of a director of a company, in relation to PAYE deducted from his remuneration. But the section applies regardless of the circumstances which led to the PAYE not being remitted to the Revenue. It can apply where a company is in genuine financial difficulties, arising from commercial set-backs, and where a receiver or liquidator has been appointed to the company.

It is worth bearing in mind that the persons affected have no right, where they are aware that the company may be in financial difficulties, to decide that they will settle their tax liabilities privately, and to direct the company to pay them gross. They are obliged to permit the company to deduct PAYE from their remuneration, whether they like it or not, and whether they think it prudent or not. This obligation is enforced upon them by the Revenue, yet the Revenue require the individual to take the entire credit risk that results from placing the tax deduction in the hands of the company.

Where a company is in financial difficulties, the trap in which shareholders, and the wide range of relatives of shareholders, may find themselves could well put pressure on directors to make payments to the Revenue Commissioners in respect of PAYE in circumstances that would amount to fraudulent preference. The policy which lies behind the placing of such pressure on directors must be questionable.

Section 997A goes even further, by deeming, in some circumstances, that PAYE deducted from the remuneration of those within the scope of the section, and remitted to the Revenue Commissioners, not to have been remitted, and by allocating such remitted amounts to cover PAYE of other persons.

The scope of this section is such that it could probably be successfully challenged in the courts under the constitutional principle of proportionality, and as an unjust attack on the rights of property. It may well also be in breach of the Human Rights Act. But unfortunately, the affected directors and employees, suffering tax on the gross amount of their remuneration while denied a deduction for the PAYE withheld from it are unlikely to be able to afford the luxury of a trip to the High Court or the Supreme Court to establish that decision

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