One of the key features of the government's response to the pandemic has been the introduction of a debt warehousing scheme by the Revenue Commissioners of VAT and PAYE debts associated with trading restrictions due to COVID-19. The scheme allows for the deferral of unpaid VAT and PAYE debts arising from the COVID-19 crisis for a period of 12 months after a business resumes trading (in accordance with the Reopening Roadmap/Living with COVID-19 Plan) and the application of a lower interest rate of 3% per annum on the repayment of such warehoused tax debts after that date.
In April 2021, the Revenue Commissioners provided an update in relation to the warehousing of PAYE debts and its impact on Section 997 (a) of the Taxes Consolidation Act 1997. This section of tax legislation states that a director or employee of a company who holds a material interest (i.e. holds more than 15% of the share capital of the company) cannot claim credit for taxes deducted if they have been warehoused and not paid over to Revenue by the company / employer. This means that the director / employee in question may be personally liable for the PAYE deducted from them but not paid over to Revenue, even if it has been warehoused.
This section of tax legislation is particularly pertinent in circumstances where a company is wound up and placed into liquidation. While the limited liability status of the company protects a director against the debts of the company, this piece of legislation overreaches the limited liability protection and can result in a personal tax liability for the directors (or employees with a material interest) of the company.
It is therefore important for company directors and owners to be mindful of the debts they have warehoused with the Revenue. In circumstances where there are funds available to start repaying the warehoused Revenue debts, perhaps it would be wise to ensure that the PAYE element is paid off in the first instance to ensure that Section 997 (a) of the Taxes Consolidation Act 1997 does not become an issue.
Crowe can provide a free and confidential initial consultation for businesses experiencing distress and business owners seeking an exit. Please contact the head of Crowe’s corporate restructuring and insolvency team, Aiden Murphy to arrange an appointment.