PAYE and PRSI on Employee Benefits - New Year Hangover by lxm94617


									     Ta xation Employee Benefits

     PAY E a n d P R S I o n E m p l o y e e
     B e n e f i t s – N e w Ye a r H a n g o v e r

     Lisa Sexton and Frank O’Neill consider the
     implementation of the new BIK rules

                                        ith effect from 1 January 2004, where an         basis of the “best estimate” that can reasonably be
                                        employer provides a taxable benefit to an        made. Clearly, it is important the employer calculates
                                        employee, the employer will be obliged to        the tax correctly. Where there is a significant number
                              operate PAYE/PRSI on an amount equal to the                of employees with taxable benefits, which may vary
                              taxable value of the benefit. Whilst such tax is           from time to time and between employees, the
                              deducted from the employee’s income, the                   administration involved will be significant, e.g. the
                              significant burden associated with calculation and         personal element of a mobile phone bill may vary on
                              collection of the tax due lies with the employer.          a monthly basis.
                                The charging provisions are Section 6 Finance Act          The employer is required to deduct the PAYE/PRSI
                              2003, which inserted a new Section 985A, into the          due in relation to the benefit on the day the notional
                              Taxes Consolidation Act 1997 and sections 16 to 21         payment is made and must remit to the Collector
                              Social Welfare (Miscellaneous Provisions) Act 2003.        General the tax in respect of the notional payment at
                              Regulations relating to the new procedures were            the time the employer ordinarily remits the
                              enacted on 17 November 2003, in Statutory                  PAYE/PRSI deducted (e.g. 14 February 2004 in
                              Instrument No. 613 of 2003.                                respect of a January 2004 liability).
                                                                                            If there is insufficient salary in a pay period of an
                                                                                         employee from which to deduct the PAYE/PRSI due
                              Operation of New Rules                                     for the period, the employer is still required to pay
                                Where an employer provides a taxable benefit for         the Collector General any PAYE/PRSI which the
                              an employee, the employer is treated as having             employer is required, but unable, to deduct. Two
                              made a notional payment on which tax must be               issues arise here, firstly the increased cost to the
                              accounted for under the PAYE system.                       employer and, secondly, the fact that the employee
                                                                                         receives no pay in the period, which will inevitably be
                                 The employer must calculate the value of          the   a bone of contention.
                              notional payment. This is an amount equal to         the
                              taxable value of the benefit. The taxable value of   the     Where there is a deficiency in an employee’s
                              benefit is to be calculated by the employer on       the   salary, the employer may recover from an

                                                                     Ta xation Employee Benefits

                                                        applied is determined by reference to the cash
                                                        equivalent of the private use of the car or van. For
                                                        cars, the cash equivalent is determined by
                                                        applying a percentage based on business mileage
                                                        to the market value of the car. For vans, the cash
                                                        equivalent is 5% of the market value of the van.
                                                           With regard to accommodation provided by an
                                                        employer, the value of the taxable benefit is the
                                                        aggregate of the annual value of the
                                                        accommodation and any expense incurred by the
                                                        employer in connection with the provision of the
                                                        accommodation. The Revenue’s rule of thumb for
                                                        calculating market rent is 8% of the market value
                                                        of the property. This, it is suggested, is inordinately
                                                        high in the current climate of rising house costs
                                                        and falling rents.
                                                          Serious issues arise in relation to the
                                                        administrative burden which is being placed on
                                                        employers. Furthermore, it is not clear that
                                                        employers are well protected in the event that
                                                        Revenue disagrees with a “best estimate”
                                                        valuation. In the event of such a disagreement,
employee’s subsequent salary that element of the
                                                        what recourse to appeal does an employer have,
liability paid by the employer. However, if the
                                                        as the employer is merely the collection agent?
employee fails to make good this amount by 31
March in the following tax year, the employee will
be treated as having received a taxable benefit for     Exclusions
the following year, equal to the amount not made
good. Thus, a further tax liability then arises.          PAYE/PRSI does not apply to the following
                                                        benefits provided/paid for by the employer:
  A further and not well publicised cost of the
new system is that the employer is liable to pay        1. A welcome concession has been made for the
employer’s PRSI in respect of notional payments            private use of company vans, where the
made to employees thus increasing the payroll              following conditions are met;
cost.                                                       * the van is supplied by the employer to the
                                                              employee for the purposes of the
                                                              employee's work,
Taxable Benefits                                            * the employee is required by the employer
                                                              to bring the van home after work,
  PAYE/PRSI will apply to the following benefits:           * apart from travelling from work to home
                                                              and back to work, other private use of the
* Private use of company cars;                                van by the employee is forbidden by the
* Private use of company vans, however see                    employer and there is no other private use;
  exclusion 1 below;                                          and,
* Free or Subsidised Accommodation;                         * in the course of his work, the employee
                                                              spends at least 80% of his time away from
* Benefits of preferential loans;                             the premises of the employer.
* Health-care premium contributions; and
                                                            Again, given the responsibility of the employer
* Perquisites generally.                                    to deduct tax, it is essentially for the employer
                                                            to ensure the conditions are met. To the
Valuation                                                   extent an employee does not satisfy the
                                                            above conditions (such as unauthorised
  As mentioned above, the taxable value of the              private use of the van) the tax burden may
benefit is to be calculated by the employer on the          rest with the employer.
basis of the “best estimate” that can reasonably be
made. Whilst in some cases, expenses incurred by
an employer in providing a taxable benefit may be       2. Small benefits. A small benefit is a benefit with
readily determinable, valuation of taxable benefits        a value not exceeding €100. However, no
can be complex and practically indeterminable.             more than one such benefit given to an
The general rule is that the perquisite is calculated      employee in a tax year will qualify for such
as the cost to the employer. This is supported by          treatment. Where a benefit exceeds €100 in
case law including Pepper v Hart (65 TC 421).              value, the full value of the benefit is subject to
   Complex rules are in place regarding the                PAYE and PRSI. It is considered that this
notional pay which applies in the case of the              threshold is simply too low and does not
private use of company cars and vans. In this              reflect ‘special occasions’ such as a wedding
regard, the notional pay to which PAYE/PRSI is             of an employee, etc.

     Ta xation Employee Benefits

                                                            3. Travel passes and car parking facilities;        taxable benefit. Records of tax recouped
                                                                                                                from employees other than by way of
                                                            4. Mobile phones, lap tops and home high-
                                                                                                                normal deduction from salary must also be
                                                               speed internet connections provided for
                                                               business use;
                                                                                                                   For the tax year 2004 and subsequent
                                                            5. Corporate charge cards             provided
                                                                                                                years, the gross pay on the end of year
                                                               exclusively for business use;
                                                                                                                return form P35 for each employee should
                                                            6. Course or exam fees, where the course            include any taxable benefits received by the
                                                               undertaken is relevant to the business of        employee during the year. Employees’
                                                               the employer;                                    forms P60 and P45 should reflect the total
                                                                                                                of ordinary salary plus the amount of any
                                                            7. Professional    subscriptions,       if
                                                               membership of the professional body is           taxable benefit paid during the year, and the
                                                               relevant to the business of the                  PAYE/PRSI in respect of the aggregate.
                                                               employer;                                           Where benefits were provided before 1
                                                            8. Shares in a company given by the                 January 2004, employers were not required
                                                               company to an employee free of charge,           to operate PAYE and PRSI, but were simply
                                                               or at a discounted price, or under a             obliged, when requested to do so by the
                                                               share scheme. Although the employee              Revenue, to report on Form P11D details of
                                                               is chargeable to tax on the benefit              benefits provided to employees. The
                                                               accruing to him or her, PAYE and PRSI do         income tax due on benefits was collected by
                                                               not apply. Instead the benefit should be         way of restricting the employee’s tax
                                                               returned in the employee’s annual                credits/reliefs so as to increase the tax
                                                               return of income. The employer must              payable to the extent required to collect the
                                                               also make a return of the benefit on             tax on the benefits. It will not be necessary
                                                               Form S02 or Form P11D, whichever is              to return on Form P11D details of benefits
                                                               appropriate;                                     that have been taxed under the new
                                                                                                                PAYE/PRSI arrangements.
                                                            9. Pension contributions in respect of an
                                                               employee to Revenue approved
                                                               pension schemes and PRSAs. An
                                                               employer’s      contribution     to   an         Conclusion
                                                               employee’s PRSA is, however, a taxable              Whilst it is considered that there are
                                                               benefit in the employee’s hands subject          significant flaws in the proposed system,
                                                               to relief up to certain limits and should        with uncertainties in certain respects,
                                                               be returned by the employer on Form              practitioners and employers generally need
                                                               P11D; and                                        to ensure compliance with the new regime.
                                                            10. Free or subsidised crêche/childcare               As evident from the above, it is critical to
                                                                facilities, subject to certain conditions. It   be aware of:
                                                                should be noted that the above does
                                                                not represent a conclusive list of              * the additional tax cost
                          Lisa Sexton and Frank O'Neill         exclusions.                                     * the tax burden and responsibility on the
                                 are tax consultants with                                                         employers;
                            Matheson Ormsby Prentice,
                     Solicitors, 30 Herbert St, Dublin 2.                                                       * valuation issues; and
                                                            Record Keeping
                                                               Employers are required to retain a record        * managing the expectations of staff who
                                                            of benefits provided to employees as well as          may suffer a lower take home pay in
                                                            the computation of the amount of each                 January.


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