Ireland: Report Advocates Tax Crackdown On Rogue Directors
Friday, February 19, 2010
Irish tax law on companies needs to be changed so that directors who wilfully
try to avoid the payment of Fiduciary taxes, such as pay related social insurance (PRSI) and 'pay as you earn' employment tax (PAYE), can be made
personably liable, a new report by the Dáil Public Accounts Committee,
published on February 17, has recommended.
The report examines the current checks and balances in place to tackle tax
evasion caused by the abuse of limited liability status and makes a series of
recommendations aimed at reducing the current level of tax write-off
and ultimate loss to the exchequer.
Fiduciary taxes are those that are collected by companies and employers from
staff and suppliers and are held in trust before being paid over to the State.
The principal fiduciary taxes are PAYE and PRSI (which are deducted from employees),
and VAT (which is collected on the sales of the companies). In the past 10 years,
the Revenue Commissioners have had to write off EUR1bn in such taxes.
In 2009 alone, a total of EUR202.9m was written off. This figure
is expected to increase in 2010 owing to the rise in the number companies going
out of business.
Committee chairman Bernard Allen said: “At a time when, regrettably,
more and more companies are going into liquidation we must ensure that we have
tight controls in place to ensure that unscrupulous company directors do not
abuse limited liability to avoid paying tax resulting in a loss to the exchequer.”
”While the Committee accepts that many companies become insolvent because
of genuine trading difficulties and only go into liquation after valiant efforts
to save the company, there is evidence that some directors are manipulating
limited liability status to circumvent their tax responsibilities.”
”Often, such directors will reopen a business, normally in the same type
of trade, under a different name. It is these rogue traders, known as 'Phoenix
Operators,' who the Committee is targeting.”
As part of its deliberations, the Committee examined best international practice
in this area and consulted with the Department of Enterprise, Trade and Employment,
the Revenue Commissioners, and the Office of the Director of Corporate Enforcement (ODCE).
The ODCE informed the Committee
that there were concerns about the behavior of directors of insolvent companies
in about 15% of liquidations examined.
Evidence to the Committee showed that at present, 1,235 company directors are
under scrutiny by the Revenue Commissioners. In 2008, 77 directors
were restricted by the High Court.
The Committee recommends the following:
- Legal provision similar to that in the UK should be introduced, which can make company directors with a
track record of noncompliance personally liable for PRSI contributions collected
by the company.
- Company law should provide that directors are required to have their tax affairs
in order when incorporating a new company or when being appointed to an existing
- A review of the phoenix operator monitoring program should be widened to examine
the interactions between Revenue and those businesses where there was a significant
tax write-off to establish whether further measures are necessary in order
to minimize the level of write-off
- The Company Law Review Group should examine whether the current levels of
capitalization required when incorporating a limited liability company should
Concluding, Bernard Allen added: “The Committee accepts that any proposal to restrict the applications
of limited liability has to be measured as we do not wish to inhibit entrepreneurial
spirit, especially at a time when new businesses generating employment are needed
now more than ever.”
”Nevertheless, what is equally important during this period of falling
exchequer returns is that we keep revenue lost to the state to the absolute
minimum. We feel these recommendations strike the correct balance in this regard.
The measures we are proposing will mean greater disincentives for fraudulent
directors and will ensure they are aware of the negative consequences which
could arise if they deliberately evade paying due tax.”