Money Mentor: can I just file an income tax return as a director?

Question: I’m reaching out as I have a query regarding my tax return. I am a shareholder and director of a company and I’ve always just filed my annual income tax return and have never fully understood the need for PAYE or the payroll system for directors. The company is based in Ireland and operates in the farming sector. I’m a bit late for this year, but it got me thinking, is it okay to continue filing my income tax return this way, or am I putting myself at risk by not using PAYE for my income?

Answer: You’re not alone on this one. It’s a common concern among directors of farming companies, especially when tax compliance feels complicated. However, while filing an income tax return is necessary, it doesn’t fulfil all your tax responsibilities as a director. Let’s get you up to speed on your obligations.

Why PAYE is important: Directors are considered office holders, meaning their income must be processed via PAYE (Pay As You Earn). PAYE applies to more than just employee salaries, it applies to director salaries too. It’s there to ensure regular deductions of taxes, PRSI, and USC throughout the year. Filing an annual income tax return is important, but it doesn’t fulfil your PAYE requirement.

Here’s the hard truth – skipping PAYE is more than just an oversight, it’s a compliance issue that can lead to significant financial and legal trouble for both you and your company.

The risks of not using PAYE: If your farming company isn’t processing your director’s income through PAYE, it’s breaking tax rules. Unsurprisingly, Revenue doesn’t take that lightly. The company could face fines of up to €4,000 for each breach, with the company secretary potentially facing an additional €3,000 per breach. Over time, these penalties can add up and put a huge financial strain on your business.

On a personal level, Revenue can hold you jointly and severally liable for unpaid PAYE taxes.

This means they can pursue either you or the company for the full amount owed, including any penalties and interest. If the company ends up paying these liabilities, you may have to reimburse it, which could affect your personal finances.

Penalties and consequences

As a director, you have extra responsibilities, including ensuring the company’s tax compliance. Not following PAYE rules could restrict or disqualify you from being a director in the future and may result in fines or even criminal charges in the most severe cases.

The impact on selling your business: If you ever need to sell your farm business due to retirement, succession planning, or any other reason, unresolved PAYE issues could create significant hurdles. Potential buyers will examine the company’s financial and tax records as part of their due diligence process. Any signs of non-compliance could lead them to lower their offers, insist on indemnities, or even walk away from the deal. PAYE issues can complicate or delay the sale process, making the business less appealing.

Why banks might care: While it’s less common for banks to go deep into PAYE compliance when assessing a loan application, they do consider the overall financial health and governance of a company. Non-compliance with tax obligations, including PAYE, could raise questions about the management’s attention to detail and overall risk. This can make the loan approval process more difficult or lead to stricter terms being applied.

A company with a clean compliance record will always have a stronger case when seeking bank financing.

What to do next: If you haven’t been processing your director’s income through PAYE, now is the time to act. Ensure that your income is processed through the company’s payroll system with the appropriate deductions made. While you should continue filing your annual tax return, remember that it isn’t a substitute for PAYE.

Consulting a tax adviser who understands the specific needs of farming companies and directors’ tax obligations can help you get back on track. Putting a compliance plan in place now will protect your financial interests

Bottom line: I’m sure the answer you got here today isn’t the one you were hoping for. My intention isn’t to frighten you, it’s to make it crystal clear that filing an annual income tax return is only one part of your tax obligations as a director. PAYE compliance isn’t optional, it’s necessary. Addressing this now will prevent potential financial and legal issues.

Marty Murphy, head of tax with ifac which is the professional services firm for farming, food and agribusiness.