Tax Fraud

Stronger Deterrents Needed to Combat Tax Fraud through the Abuse of Limited Liability Status-D il Public Accounts Committee

17TH Feb 2010

Company law needs to be changed so that directors who wilfully try to avoid the payment of Fiduciary taxes, such as PRSI and PAYE, can be made personably liable, a new report by the D il Public Accounts Committee has recommended today.

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 write-off of this tax 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 that are deducted from employees and VAT which is collected on the sales of the companies. In the past ten years, the Revenue Commissioners have had to write-off €1 billion in such taxes. In 2009, a total of €202.9 million of this tax was written off. This figure is expected to increase this year owing to the rise in number companies going out of business.

Committee Chairman, Bernard Allen TD 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 Operators1” 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.

The Office of the Director of Corporate Enforcement informed the Committee that there were concerns about the behaviour of director 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, seventy-seven directors were restricted by the High Court.

The report’s key recommendations are:

The Committee recommends that the law, which exists in the UK which can make company directors with a track record of non compliance, personally liable for PRSI contributions collected by the company.
That company law provide that directors are required to have their tax affairs in order when incorporating a new company or when being appointed to an existing company.
A review of the phoenix operator monitoring programme 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 minimise the level of write-off
That the Company Law Review Group examine whether the current levels of capitalisation required when incorporating a limited liability company should be increased.

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.”

The title of the report is Report on the Loss of Fiduciary Taxes arising from Abuse of Limited Liability. It is available at www.oireachtas.ie