Directors' Salaries

A

accsvalue

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The company is an IT consultancy with a turnover of approx €40k per annum. Director A owns 100% of the shares and is the expert. He also earns PAYE income outside the company. Director B is his spouse. She knows nothing about IT but does some bookkeeping/admin work.

Director B earns more than Director A in order to lower their overall personal tax liability. Does the Revenue Commission care?

Thanks in advance.
 
revenue have no interest in assessing the value of work done by an employee, wheter or not that employee is a director. If salary is appropriately taxed then there is no issue.
 
44brendan said:
revenue have no interest in assessing the value of work done by an employee, wheter or not that employee is a director. If salary is appropriately taxed then there is no issue.
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I wouldn't be so sure.

If the salary is excessive in relation to the actual duties performed, then in my opinion, you're asking for trouble.

In my experience, these days Revenue are interested in the smallest details (whether within the scope of an audit or not).
 
Tomorrow said:
I agree.
Revenue would be interested if it could be proven that salary is excessive when compared with what the job entails.

www.accountantonline.ie
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I may well stand corrected. Based on a joint assessment I'm assuming that the OP is referring to a salary base that maximises the lower tax rate. This would not be a significant salary & anything paid above that limit would afaik not reduce the overall tax payable. Out of curiousity why would the Revenue have an issue here?
 
44brendan said:
I may well stand corrected. Based on a joint assessment I'm assuming that the OP is referring to a salary base that maximises the lower tax rate. This would not be a significant salary & anything paid above that limit would afaik not reduce the overall tax payable. Out of curiousity why would the Revenue have an issue here?
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Precisely because an artificially high salary has the effect of maximising the lower rate band, and thereby reducing the income tax liability. Artificially being the operative word.

Take the case of a small Ltd co. generating enough cash that the proprietor can afford to pay himself a salary of 60k Gross - assume for the purpose of this illustration that his spouse doesn't have a separate PAYE employment using up any of her std rate band.

On a salary of 60k gross, with all of it being paid to one spouse the net pay comes out at about 41,500.

If they decide to pay the husband 40k gross and the wife 20k gross, the net pay is about 46,100 (assuming the wife goes on Class S PRSI, which I'm not going to get into here).

So that's tax of 18,500 under the first scenario or 13,900 under the second scenario, a difference of 25%. Therefore, Revenue may well want to know that a spouse, with a salary that conveniently uses up the standard rate band, is in fact active in the business and being paid an amount commensurate with the work performed...
 
Acknowledged. Obviously the illustration assumes a situation where the "work" being done by the spouse is effectively a position manufactured to generate a tax reduction. Practically it would be difficult for the Revenue to spot such a situation. Although admittedly in a small 1 person type operation such an anomoly could give rise to questions.
 
44brendan said:
Acknowledged. Obviously the illustration assumes a situation where the "work" being done by the spouse is effectively a position manufactured to generate a tax reduction. Practically it would be difficult for the Revenue to spot such a situation. Although admittedly in a small 1 person type operation such an anomoly could give rise to questions.
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Sorry, I wasn't entirely correct in what I said above, and I'll just clarify:

What I said above is entirely true in the case of a sole trader employing there wife, or a Ltd co. if the spouse isn't a director.

However in the case of a company, and where the spouse is also a director, as is the case in the OP's situation, then there is no problem, as what is being paid is Director's remuneration, which can be any amount, at the discretion of the shareholders of the company.
 
Great, thanks for the clarification. The rules change so often that its hard to keep track :D
 
She's a director of the company. Best of luck to Revenue if they try and shoot that one down.

In the circumstances of a one man band where the husband and wife are directors, there's a word for a couple that don't maximise their standard rate cut off points - Idiots.
 
Gekko said:
She's a director of the company. Best of luck to Revenue if they try and shoot that one down.

In the circumstances of a one man band where the husband and wife are directors, there's a word for a couple that don't maximise their standard rate cut off points - Idiots.
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Ah now that's a bit strong! Poorly advised would be more apt IMHO, as this is the kind of area where a decent accountant earns their fee.
 
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