The taxpayer appealed Revenue’s decision to deny them a credit for income tax deducted from their salary but not paid over to Revenue. The relevant legislation is section 997A of the Taxes Consolidation Act 1997 (TCA 1997).

Background

The taxpayer, a director with a 35% shareholding in the company prior to it being wound up, received emoluments amounting to €116,547 in 2009 and €78,489 in 2010. The tax arising for 2009 amounted to €38,272, but only €17,074 was credited against the taxpayer’s tax liability, representing the amount actually remitted by the company to Revenue, leaving a balance due for that year of €21,198. The company deducted income tax of €24,333 for 2010 from the taxpayer but failed to make any payment to Revenue in respect of that tax for that year.

The taxpayer filed income tax returns claiming a credit for the full amount of tax deducted by the company in respect of the emoluments paid.

Revenue raised assessments for 2009 and 2010 limiting the credit for the income tax deducted to the amount remitted to by the company – €17,074. The taxpayer had a personal liability of €21,198 and €24,333 for the years 2009 and 2010 respectively.

Section 997A TCA 1997 denies a credit for tax deducted from the emoluments paid to certain directors and employees in the absence of documentary evidence that confirms that the tax deducted from those emoluments was remitted to the Collector-General.

Submissions

The taxpayer’s principal claim was that the application of section 997A TCA 1997, has the effect of taxing emoluments that the taxpayer did not receive and to cause a balance of tax to arise that, although described as a tax liability, is in fact a substantial penalty moving the tax liability of an employer company to its directors and is as such a disproportionate penalty in the context of Human Rights.

The taxpayer further submitted that Revenue are bound by Article 49(3) of Charter which lays down the principle of proportionality to ensure that the “severity of penalties must not be disproportionate to the criminal offence.” The taxpayer claimed that section 997A TCA 1997 “punishes a director and acts as a deterrent to reoffend and is therefore characteristic of a criminal offence.” The taxpayer supported the argument with a decision of the European Court of the Human Rights in Engel v Netherlands (No l) (1976) I EHRR 647.

The taxpayer further claimed that the effect of the section according to the taxpayer is contrary to the principle of limited liability and disregards the existence of the employer company as a separate legal personality to the directors.

Revenue disagreed that Article 49 of the Charter was relevant. According to Revenue the emoluments were received by the taxpayer and therefore the taxpayer was liable for the tax unpaid. The Charter does not allow the taxpayer to avoid paying taxes lawfully due. As the Charter had no application, section 997A TCA 1997 does not operate to hold a taxpayer guilty of any criminal offence or impose a penalty for committing a criminal offence.

Analysis

The TAC noted that the company had adopted Regulation 80 of Part 1 of the Companies Act which provides “the authority to the directors to manage the business of the company.” The company could “only act through the actions of its directors”.

Consideration of the Convention and the Charter in Human Rights with regard to the imposition of tax by the TAC was necessary given the taxpayer’s claims. The TAC quoted decisions in Fortune v The Revenue Commissioners [2009] ITR 87, Jussila v Finland [73053/01], and NKM v Hungary [66529/11]

The EU case law cited by the taxpayer as part of their claim relates to the Convention and not the Charter. The TAC held that “further consideration of the Convention is not relevant as the taxpayer appears to be relying solely on the provisions of the Charter, specifically Article 49(3) which ensures that the “severity of penalties must not be disproportionate to the criminal offence”.”

Turning to the Charter and considering the Engel case, the TAC noted that section 997A TCA 1997 does not constitute an offence. The scope of the section is not a deterrent but a collection mechanism. According to the TAC “It ensures that such individuals cannot abdicate the responsibility to pay income tax on their emoluments to an inanimate entity.” The application of section 997A TCA 1997 does not constitute a penalty, it is not an offence under national law.

The taxpayer’s argument that the section disregards the existence of a company’s separate legal personality fails to consider that the section was introduced to give statutory authority to “deny prescribed individuals from claiming a credit for the income tax deducted from their emoluments but not remitted to the Respondent by companies in which those individuals hold a material interest.”

The taxpayer failed “to recognise that companies, as inanimate bodies, can only act through the actions of its directors and in accordance with their contractual and fiduciary obligations and powers vested in the board of directors in accordance with the Articles of Association.” The Convention is not appropriate as the provisions of section 997A TCA 1997 falls into the exceptions prescribed by the Convention.

Determination

The TAC determined that the assessments for the years 2009 and 2010 that deny a credit for the tax deducted from his emoluments in the amounts of €21,198 and €24,333 for the years 2009 and 2010 respectively are correct.