# No PAYE Tax credit for Proprietary Directors



## milly123 (20 Oct 2010)

Hi,

Can anyone tell me what the reasoning behind this is ? I'm curious   Is it another way of penalising entrepreneurs ?


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## DB74 (20 Oct 2010)

No Employers' PRSI
Mobile phone bills paid by the company
Most motor exps paid by the company


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## Towger (20 Oct 2010)

And since you are the boss you can always pocket a few bob!


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## z107 (20 Oct 2010)

Normal employees can have these 'perks' too.

As a director, my expenses are very small simply because I do not incur many expenses. It certainly doesn't come close to the extra PAYE tax credits.
'S' class directors also lose out on most social welfare benefits.


The only reason I can think why this is the case, is that _those in charge_ believe that all directors are fabulously wealthy and enjoy a multitude of tax breaks, and dodgy expense claims. Unfortunately, many directors are on less than minimum wage, and this just represents yet another nail in the coffin.

Over the last few years, entrepreneurs weren't needed as the government relied on bubble property taxes and MNC money. Times are changing.


I'd also love to know how I can 'pocket a few bob' when all money coming into the company is fully recorded and open to Revenue inspection.


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## Towger (20 Oct 2010)

umop3p!sdn said:


> I'd also love to know how I can 'pocket a few bob' when all money coming into the company is fully recorded and open to Revenue inspection.


 
We wonder the same thing here, you need to move from the payroll business into a nice cash business or trade.

I could see the government doing away with the PAYE allowance. A nice simple clean cut, no need to bring in messy Water charges/Rates/Pole tax with high admin costs etc. They just need to get the P2Cs/Tax Certs out to employers in time for the first payroll run. No mean feat when many companies run their first payroll for the year mid December.


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## z107 (20 Oct 2010)

I have often thought of at least having a 'tips' jar.


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## T McGibney (20 Oct 2010)

DB74 said:


> Mobile phone bills paid by the company
> Most motor exps paid by the company



Note that directors are taxable under BIK for private mobile phone use and (at fairly swingeing levels) for private use of company vehicles. Note also that if a director without a company vehicle reclaims private mileage from the company, then they are subject to serious Revenue penalties and also possible ODCE proceedings.


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## DB74 (20 Oct 2010)

I am fully aware of the tax laws thanks

I have never seen a company director charged BIK for use of a mobile phone while it is next to near impossible for a revenue official to disprove business mileage claimed by a director unless the mileage claimed is greater than the odometer on the car involved.

Nonetheless, being charged BIK is a lot less expensive than paying for the expenses from after-tax income


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## z107 (20 Oct 2010)

> I have never seen a company director charged BIK for use of a mobile phone while it is next to near impossible for a revenue official to disprove business mileage claimed by a director unless the mileage claimed is greater than the odometer on the car involved.


You are describing tax evasion. Evading taxes is open to everyone, including employees.  It has nothing to do with director status.

BTW, I pay BIK on my health insurance, and pay all my mileage and phone personally (after tax). We just don't want any 'red flags' on the books.



> Nonetheless, being charged BIK is a lot less expensive than paying for the expenses from after-tax income


I don't understand this comment. How is BIK less expensive and why would someone pay for expenses from net pay?
Employees and directors can both claim expenses, and both can pay BIK.


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## taxman (21 Oct 2010)

Any individual whose income is subject to PAYE i.e. Wages, Salaries, Occupational Pensions, Social Welfare Pensions, Benefit in Kind, etc. can claim for  this. The PAYE Tax Credit cannot exceed the individual's PAYE income at the Standard Rate. Any restriction which may arise, will be calculated on review at the end of the year.
savingpoint(dot)com


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## deadlyduck (21 Oct 2010)

Some info re mobile phones and BIK- basically, private usage does not give rise to a BIK charge once it's 'incidental' to business usage:

http://www.revenue.ie/en/tax/it/leaflets/benefit-in-kind/faqs/miscellaneous.html#misc33


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## z107 (21 Oct 2010)

The point is that BIK or expense rules are the same for employees as they are for directors, and are not a reason why directors should not get PAYE tax credits.


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## kevinc (18 Nov 2010)

*paye credit*

If you leave a paye job during the year and become a proprietary director do u lose your paye credit for the whole year?


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## mandelbrot (18 Nov 2010)

OK, firstly I'm not sure how ye all descended into a debate about mobile phones and mileage expenses when the OP's question was about the PAYE tax credit!

But to answer the OP's question, the reasoning behind this rule is that a proprietary director is effectively self employed. Generally they have opted to trade via a limited company, in order to enjoy the benefits of 1) limited liability, and 2) the lower rate of corporation tax, compared to the marginal rate of income tax. They are able to dictate the terms of their relationship with the company, decide when and how much salary (and, yes expenses, perks etc...) they draw from the company. Seems pretty reasonable to me.

And as regards it being another way to penalise entrepreneurs, it actually only serves to level the field between a sole trader and a proprietary director, as a sole trader is not entitled to a PAYE tax credit either (nor do they have the option, in the event that they are fortunate enough to make a decent profit, to choose how much to have taxed as a salary and how much to shelter in the company at a rate of 12.5%).


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## Gervan (19 Nov 2010)

For kevinc : you use as much of your Paye tax credit as can be absorbed by your previous employment. Just you can't use the Paye tax credit against your proprietary director income.


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## Panacea (20 Nov 2010)

mandelbrot said:


> But to answer the OP's question ........... to level the field between a sole trader and a proprietary director, as a sole trader is not entitled to a PAYE tax credit either (nor do they have the option, in the event that they are fortunate enough to make a decent profit, to choose how much to have taxed as a salary and *how much to shelter in the company at a rate of 12.5%*).


 
Such undistributed profits are generally subjected to a close company surcharge for starters, and remember passive income no charged to corporation tax at 12.5%.....

Then there is the issue of income tax on distribution when the proprietary director decides to pay it out.....


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## z107 (20 Nov 2010)

Indeed, every year we try to minimise any profits so we do not incur corporation tax as well as all the other myriad taxes and charges. We end up taking it out as income.
It terrible really, because I'd love to leave some money in the company to give us a bit of breathing space. (Especially so now that the economy has been destroyed.)


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## mandelbrot (20 Nov 2010)

Panacea said:


> Such undistributed profits are generally subjected to a close company surcharge for starters, and remember passive income no charged to corporation tax at 12.5%.....
> 
> Then there is the issue of income tax on distribution when the proprietary director decides to pay it out.....



The applicability of a  surcharge depends on the type of trade being carried on, and passive income is still charged at a more favourable rate than if it were earned in the hands of an individual.

And then there are numerous ways of extracting funds to minimise liabilities further down the line (generous pension provisions for directors, retirement relief etc)


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## z107 (21 Nov 2010)

> And then there are numerous ways of extracting funds to minimise liabilities further down the line (generous pension provisions for directors, retirement relief etc)


Please do elaborate.

Pensions (which are also taxed, if you're lucky enough to have one and the fund hasn't collapsed) and....


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## mandelbrot (21 Nov 2010)

umop3p!sdn said:


> Please do elaborate.
> 
> Pensions (which are also taxed, if you're lucky enough to have one and the fund hasn't collapsed) and....



OK, maybe "numerous" is an exaggeration..!

But yes, the rules for pension contributions for proprietary directors  are infinitely preferable to those for a sole trader. The company can  get a tax deduction for an amount that can be a multiple of the  director's salary. And obviously all pension income is taxed ultimately  (whether it was funded by a sole trade or company), so I don't see how  that's relevant.

Then there's the provisions relating to company buyback of shares, which  coupled with CGT retirement relief, allow for very tax efficient ways  to extract from a company, funds which may have accumulated having been  taxed at a rate which is only a fraction of the rate that would have  applied if the profits were earned in a sole trade. (Retirement relief, while it may also apply to the disposal of the assets of a sole trade, applies to disposal of assets that have been accumulated subject to profits being taxed at the sole trader's marginal rate).

But this is all way off topic - I reiterate the point that a prorietary director is _effectively_ a self employed person, and that is why they quite rightly don't get a PAYE tax credit.


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## z107 (21 Nov 2010)

> I reiterate the point that a prorietary director is effectively a self employed person, and that is why they quite rightly don't get a PAYE tax credit.


No. The logic doesn't follow.

What difference does it make if the director is self employed?
(Forget about pensions for the moment, there are a huge number of directors who can't afford any kind of pension)


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## mandelbrot (21 Nov 2010)

umop3p!sdn said:


> No. The logic doesn't follow.
> 
> What difference does it make if the director is self employed?
> (Forget about pensions for the moment, there are a huge number of directors who can't afford any kind of pension)



The difference is that the PAYE tax credit is for employees! i.e. People who don't sign their own wages cheques, who don't decide how much those wages are, who don't decide when, where, and how they work... there is a huge distinction there. Proprietary directors, by and large are such because they were already self employed and chose to incorporate the business. So, I believe yes, the logic does follow.

Just to clarify, are you saying you believe that all proprietary directors should get a PAYE tax credit? (or are you just trolling me?!)


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## z107 (21 Nov 2010)

Of course directors should get this tax credit!
How about even restricting it to those on less than the average industrial wage?

You make it sound like directors have complete carte blanch on how much they get paid. Well I get paid the same amount every month, just like every other PAYE worker.

I suppose this might not even matter after 7 December. Maybe no one will be getting the PAYE tax credit.


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## McGrath (21 Nov 2010)

@mandelbrot:

A director is considered "properietary" and denied the PAYE credit if he owns 15% or more of the shares in the company.

At that level of shareholding, he could still be Class A PRSI and treated as an employee for those purposes.

Under company law, he would have little power in the ultimate control of the company with only 15% of the shares.

So I don't believe it is accurate to describe a director who is denied the PAYE credit as "effectively self-employed".


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## mandelbrot (21 Nov 2010)

McGrath said:


> @mandelbrot:
> 
> A director is considered "properietary" and denied the PAYE credit if he owns 15% or more of the shares in the company.
> 
> ...



I can only talk about my personal experience with proprietary directors. I spent 7 years in accountancy practice, during which time I dealt with well in excess of 100 client companies. I cannot remember a single instance where I encountered a proprietary director who owned over 15% of the share capital, but did not exercise any control.

I now have a different job, and it regularly involves looking at company directors and their relationships with their companies, and again I'm genuinely struggling to recall a situation such as you describe (at a conservative estimate, I've looked at another maybe couple of hundred companies).

I reckon that the number of people who fall into this category (not actually exercising control, but denied a PAYE credit) is miniscule. But I do take your point, 15% is a bit of an arbitrary figure, and the treatment should probably be consistent with the social insurance treatment. - i.e. Class A (& PAYE credit) for any director who has no control, and who can be shown to be *No Different* than any other employee, and Class S (& no PAYE credit) for any director, regardless of level of shareholding, who can be shown to be effectively self-employed. I think that'd be fair.


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## T McGibney (22 Nov 2010)

mandelbrot said:


> I can only talk about my personal experience with proprietary directors. I spent 7 years in accountancy practice, during which time I dealt with well in excess of 100 client companies. I cannot remember a single instance where I encountered a proprietary director who owned over 15% of the share capital, but did not exercise any control.
> 
> I now have a different job, and it regularly involves looking at company directors and their relationships with their companies, and again I'm genuinely struggling to recall a situation such as you describe (at a conservative estimate, I've looked at another maybe couple of hundred companies).
> 
> I reckon that the number of people who fall into this category (not actually exercising control, but denied a PAYE credit) is miniscule.



Sorry, I'm totally stumped by this argument. A person has no business being a company director if they are not in a position to exercise some level of control over the company and its affairs. This applies regardless of whatever status they may have as a shareholder. On the other hand, there are executives out there whose personality dominates their company yet they mightn't necessarily own 15% of their employer company. Did Sean Fitzpatrick own 15% of Anglo?


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## mandelbrot (22 Nov 2010)

T McGibney said:


> Sorry, I'm totally stumped by this argument. A person has no business being a company director if they are not in a position to exercise some level of control over the company and its affairs. This applies regardless of whatever status they may have as a shareholder. On the other hand, there are executives out there whose personality dominates their company yet they mightn't necessarily own 15% of their employer company. Did Sean Fitzpatrick own 15% of Anglo?



I'm not sure whether you're agreeing or disagreeing with me Tommy! plc's are a different kettle of fish in the context of what I'm talking about here, which is the couple of hundred thousand private Ltd's. All I'm trying to say is that to the extent that a company director, regardless of their actual shareholding, is in control of the company and able to dictate the terms of their relationship, then they should clearly be considered self employed. A consequence of which is no PAYE credit.

Are you saying you think that no directors at all should be allowed the PAYE credit, or am I misunderstanding what you said? (This could be unfair in some instances where for example, the 100% owner of the company appoints an employee to be the 2nd director, merely to comply with the legal requirements, and in such a case the employee would exercise no real power...)


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## T McGibney (22 Nov 2010)

I have my own opinions on the PAYE credit, which are neither here nor there in the context of the current discussion. 

The point I am making here is that the '15% shareholding rule' is arbitrary and pointless in the context of determining an individual's entitlement or otherwise to tax credits. It is simply impossible to measure the extent of control that an individual director or manager may have on a company by reference to their shareholding in the company. Why this intangible needs to be measured in the first instance is beyond me.

To be frank, the 15% rule sounds like something that was dreamed up at some stage by a Sir Humphrey, who knew lots about keeping his political contacts and masters happy, but precious little about the complexities of business in the real world.


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## mandelbrot (22 Nov 2010)

Won't argue with you there at all, Sir Thomas!


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## T McGibney (22 Nov 2010)




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