Is this legal?

Roger Mellie Man on the Telly

My colleague is working a three day week. Her boyfriend is self employed and employs her for a very high salary which he never pays to her. He just pretends to employ her just to be able to deduct cost for a personal assistant from his tax bill somehow. Sorry I am not very knowledgeable about tax matters... it’s kind of fake employment .. is this allowed? Is this a legal loophole to pretend that somebody is employed by you but that in reality they do not do any work for you and you do not really pay them? It’s starting to really annoy me as I always have to finish off or correct her work on her days off... now she has been offered fulltime employment and does not take it because the tax thing with her boyfriend would not work anymore...

gerrybbadd

Roger Mellie Man on the Telly wrote: »

My colleague is working a three day week. Her boyfriend is self employed and employs her for a very high salary which he never pays to her. He just pretends to employ her just to be able to deduct cost for a personal assistant from his tax bill somehow. Sorry I am not very knowledgeable about tax matters... it’s kind of fake employment .. is this allowed? Is this a legal loophole to pretend that somebody is employed by you but that in reality they do not do any work for you and you do not really pay them? It’s starting to really annoy me as I always have to finish off or correct her work on her days off... now she has been offered fulltime employment and does not take it because the tax thing with her boyfriend would not work anymore...

No it's not legal. It's tax evasion

ebbsy

Is he paying Paye on her salary ? If not he would want to be careful as the Revenue could come looking for back taxes etc if he declares it.

wally1990

No it isn't not legal

Please see the family member section where the same principals would be applied

Wages and salaries are expenses to a company and allowable as a tax deduction
What he is doing is fraud/tax evasion and highly illegal

https://www.revenue.ie/en/tax-professionals/tax-briefing/2013/tax-briefing-04-2013.pdf

phildin

It's not possible to say whether what he's doing is legal based on the information you have given but it sounds dodgy since what he's doing should really not result in a tax gain for him.

He is perfectly entitled to pay a high salary to his girlfriend (let's say €100k). In doing so, he can deduct €100k from his company's profit and thereby reduce his corporation tax bill. However, since profits are taxed at 12%, he only stands to gain €12k max by doing so. On the other hand, while he doesn't have to hand over the €100k to his girlfriend, the following does occur:

1. The unpaid €100k goes into his books as money owed. His girlfriend is now a creditor. He'd better not forget her birthday
2. The unpaid €100k still attracts a tax liability in the form of employer PRSI, employee PRSI and PAYE. This must be paid on time otherwise the revenue commissioners will pursue him and it will be somewhere in the €40k region. It wouldn't make sense to do this since he would incur a €40k tax liability in order to avoid a €12k liability.

If he's audited and hasn't paid the PRSI/PAYE then he's automatically in trouble regardless of what his intentions for the €100k were. If he has paid the relevant taxes then it would be quite a puzzling situation. He might be doing it to claim some unused tax credits on the part of his girlfriend but that wouldn't yield very much and if his girlfriend in not genuinely the beneficiary of the money then he definitely will be committing fraud.

In summary, paying a salary to his girlfriend in order to reduce his tax bill is not inherently fraudulent provided that he pays the tax incurred and provided that someone else isn't the true beneficiary of the salary. It's not necessary for him to actually pay the salary as long as he records it as a liability but he must pay the full taxes on time. With that in mind, I can't think of a way whereby he could legally benefit from this and it incurs a substantial risk so I suspect that in reality, the boyfriend:

1. Doesn't really understand tax law
2. Thinks he has found a loophole that allows him to defraud the revenue commissioners
3. Hasn't
4. Will get a rude awakening when he goes through his first audit

[I just noticed the briefing above. My understanding was that a company owner could decide to pay any random person, any random amount for any random (legal) service, provided that all amounts were declared and taxes paid. The notice above suggests that this is not necessarily the case. So if I employ my spouse as "Head of Awesomeness" and pay him/her €250k, I might be called upon to justify the salary/position even if everything is fully declared and paid up. It seems that Revenue might conclude that such a position was not genuine and consider it to be fraud.]

barneystinson

phildin wrote: »

It's not possible to say whether what he's doing is legal based on the information you have given but it sounds dodgy since what he's doing should really not result in a tax gain for him.

He is perfectly entitled to pay a high salary to his girlfriend (let's say €100k). In doing so, he can deduct €100k from his company's profit and thereby reduce his corporation tax bill. However, since profits are taxed at 12%, he only stands to gain €12k max by doing so. On the other hand, while he doesn't have to hand over the €100k to his girlfriend, the following does occur:

1. The unpaid €100k goes into his books as money owed. His girlfriend is now a creditor. He'd better not forget her birthday
2. The unpaid €100k still attracts a tax liability in the form of employer PRSI, employee PRSI and PAYE. This must be paid on time otherwise the revenue commissioners will pursue him and it will be somewhere in the €40k region. It wouldn't make sense to do this since he would incur a €40k tax liability in order to avoid a €12k liability.

If he's audited and hasn't paid the PRSI/PAYE then he's automatically in trouble regardless of what his intentions for the €100k were. If he has paid the relevant taxes then it would be quite a puzzling situation. He might be doing it to claim some unused tax credits on the part of his girlfriend but that wouldn't yield very much and if his girlfriend in not genuinely the beneficiary of the money then he definitely will be committing fraud.

In summary, paying a salary to his girlfriend in order to reduce his tax bill is not inherently fraudulent provided that he pays the tax incurred and provided that someone else isn't the true beneficiary of the salary. It's not necessary for him to actually pay the salary as long as he records it as a liability but he must pay the full taxes on time. With that in mind, I can't think of a way whereby he could legally benefit from this and it incurs a substantial risk so I suspect that in reality, the boyfriend:

1. Doesn't really understand tax law
2. Thinks he has found a loophole that allows him to defraud the revenue commissioners
3. Hasn't
4. Will get a rude awakening when he goes through his first audit

[I just noticed the briefing above. My understanding was that a company owner could decide to pay any random person, any random amount for any random (legal) service, provided that all amounts were declared and taxes paid. The notice above suggests that this is not necessarily the case. So if I employ my spouse as "Head of Awesomeness" and pay him/her €250k, I might be called upon to justify the salary/position even if everything is fully declared and paid up. It seems that Revenue might conclude that such a position was not genuine and consider it to be fraud.]

I pretty much tuned out after you said the word company. You must learn to RTFQ...!

You're right that it doesn't make sense if the guy is a company, because he clearly isn't a company, he's a self employed sole trader.

I'd say all things being relative, the OP's description of her going through the books for a huge salary needs to be looked at in context. She might be earning 15k for her 3 day week and going through his books for up to nearly 20k to maximise the use of lower tax and USC bands.

Although if he's employing her under a Class A employment, as he should be, he's probably only saving himself about 12% x 19k versus if he didn't employ her at all. Not worth it for the risk of a big redundancy or unfair dismissal claim if they were ever to break up.

tanit

My guess is that they are living together and he is keeping the money getting the whole thing without having to pay taxes at the higher rate. Probably using her bands and extra tax credits to avoid paying more. Legal is not but so long as he is paying taxes for the employee to Revenue, they are in clear so long as nobody reports them and Revenue decides to go for an audit and check if there's anything else that might be amiss (more than likely in this case but considering types of tax evasion this one is one of the less damaging to Revenue arks)

She is not very smart if she is not getting the money and he is opening himself to a huge problem in the future if they break up and suddenly she gets smarter and decides to go for unfair dismissals, unpaid wages etc.

jimmycrackcorm

I'm curious as to how he is doing it as he would have to still pay taxes. The only benefit I can see is if it works out lower based on her tax band instead of adding it to his own gross.

If I were in his position I'd be putting the money into a pension instead.

Roger Mellie Man on the Telly

Thank you all for your replies... very helpful. I will not report them, though next time I am finishing off her work while she is on a long weekend away again I might be fuming. I am not bitter at all!

Pawwed Rig

I would think he is utilising SRCOP whereby income that would be taxed at 40% for him is hitting the 20% band for her. Not entirely unusual behaviour but I would look to be building some substance around the 'employment position'

scheister

I have seen the above done a few times but always with spouses or family members. First time i have seen it done for boy/girlfriend. I can see logic to it reduced his 40% she is taxed at 20% but as people have said if it goes sour their could be great fun. If that happens OP get some popcorn and enjoy the show

lawred2

Roger Mellie Man on the Telly wrote: »

My colleague is working a three day week. Her boyfriend is self employed and employs her for a very high salary which he never pays to her. He just pretends to employ her just to be able to deduct cost for a personal assistant from his tax bill somehow. Sorry I am not very knowledgeable about tax matters... it’s kind of fake employment .. is this allowed? Is this a legal loophole to pretend that somebody is employed by you but that in reality they do not do any work for you and you do not really pay them? It’s starting to really annoy me as I always have to finish off or correct her work on her days off... now she has been offered fulltime employment and does not take it because the tax thing with her boyfriend would not work anymore...

that doesn't make any sense

Pawwed Rig

lawred2 wrote: »

that doesn't make any sense

Makes sense to me.

lawred2

Pawwed Rig wrote: »

Makes sense to me.

as a way of reducing a tax bill? not really - unless she earns a lot less than 33k

the fact that the actual salary is being withheld is seriously dodgy

Pawwed Rig

lawred2 wrote: »

as a way of reducing a tax bill? not really - unless she earns a lot less than 33k

That would be my assumption

jimmycrackcorm

Pawwed Rig wrote:

That would be my assumption

Especially if she only works a three day week. It would be hard to prove she wasn't working the other two days for the boyfriend. If he was withdrawing the cash nett directly also then it would also be difficult to prove that she didn't get that money either