Employers are faced with many compliance and filing obligations which can often be a strain on the resources required to deal with them. However, as recent times have seen increased focus by Revenue on PAYE/PRSI compliance, employers cannot afford to ignore these obligations.

As we are now approaching the end of the 2010 tax year, it is a good time to start thinking about the end of year filing requirements. Employers should take this opportunity to put themselves in the best position to make this filing requirement as pain free as possible.

P35 Filing Deadline

For 2010, the P35 must be filed by 15 February 2011 (if filing via ROS, an extension is available until 23 February 2011). All employers, no matter how big or small are obliged to file a P35 form for 2010 if they had persons engaged either as employees or directors during the year. Failure to file a correct P35 by the filing deadline can result in the imposition of penalties by Revenue. Details of the various penalties are set out later in this article.

There is still some time to the filing deadline for 2010 so employers now have an opportunity to make sure they are fully prepared by reviewing the tax treatment of all payments and benefits provided to employees or directors. Any adjustments required can be made now rather than trying to reconcile later through an amended/adjusted P35.

Areas to Consider

The following list is by no means exhaustive but will give employers a flavour of the items that could cause difficulties if they are not addressed before the end of the tax year:

Benefits

• Employers should ensure that all taxable benefits have been correctly calculated and taxed as notional pay through the payroll.
• Where special reliefs have been availed of, such as a reduced BIK rate for business mileage over a certain threshold, the employer should ensure that all records in relation to this business mileage are accurately recorded.
• Difficulties often arise in relation to the treatment of medical insurance premiums where the employer pays some or the entire premium. Now is the time to check this to make sure it is being taxed correctly.
• If utilising the annual €250 small benefits exemption, employers should ensure that it has been properly applied otherwise a tax exposure could arise.

Expenses

• Recent Revenue audit activity has seen an increased focus on the payment of expenses to employees. Employers should take this opportunity to review all expense payments to ensure that the correct tax treatment has been applied. Where travel and subsistence payments have been made using the civil service rates, these should be reviewed to ensure the correct rates have been applied.

Income Levy

• The Income Levy rate which is applicable depends on the level of gross income in that particular pay period. Additional payments such as holiday pay, overtime or bonuses can push an employee's income into a higher rate than normal. In such circumstances, when reviewed on an annual basis, an overpayment may arise. An employer may refund any excess income levy deducted at the end of the year provided the employee has been in continuous employment with that employer from the start of the tax year. Details of the income levy for employees are returned on Form P35L.

Pension contributions

• There are limits on the amount an individual can contribute to an occupational pension scheme depending on their age. In addition, employee contributions are subject to an overall earnings cap of €150,000 for 2010. Employers should check their records to ensure that the contributions from each employee are within these limits.

Revenue audits

• Increased activity in this area means many employers will have had a visit from the ‘taxman’ this year. Revenue audits can uncover incorrect practice with regard to payments/benefits to employees and whilst settlements can be made for historic practice, it is important that remedial action is taken to ensure the mistakes are not repeated in the future. If an employer has had a visit from Revenue which identified errors, the employer should ensure that steps have been taken to correct this in the current year.

Price for Getting it Wrong

There is a penalty of up to €4,000 for failure to submit the required year end (P35) return to the Collector General. In addition, the company secretary will be liable to penalties of €3,000 for the same regulation breaches.

In the event that the P35 is submitted but is negligently completed (which could be deemed to be the case where the company is aware it is not meeting its PAYE withholding tax obligations), the company will be liable to a penalty of €125 and the company secretary will be liable to a penalty of €1,500. In addition, any person who deliberately assists in the making of any incorrect return will be liable to a penalty of €5,000.

There is a set penalty of €4,000 for failure to correctly calculate and remit the PAYE withholding tax due under the PAYE regulations.

In addition, tax-geared penalties may also be applied where the P35 is wrong or is not actually filed. These penalties are calculated on the difference between the tax paid and the actual tax due and the penalties can range from 3% of the remaining tax due (where the underpayment is less than 15% of the correct tax due for the relevant period and an unprompted qualifying disclosure is made to Revenue) to 100% of the remaining tax due (in the case of deliberate behaviour with no co-operation with Revenue).

Interest on the underpayment of PAYE is charged at a daily rate of 0.0274% from the date on which the tax should have been paid to the date on which it is actually paid. However, in cases of neglect, interest can be levied at a rate of 2% per month, or part of a month, until payment is made.

Conclusion

Statutory audits do not generally cover the detail required to identify if there are any issues with PAYE and how it is operated. Just because a PAYE figure is not queried during a statutory audit does not necessarily mean that PAYE is being operated correctly. Likewise, employers can become complacent so long as payroll appears to be running smoothly. However, as the end of year approaches, employers should take this opportunity to review how payments and benefits to employees have been taxed and take any corrective action now so that the P35 is right. Employers should not assume that because an item has always been treated in a certain way that it is necessarily correct. It is easier to make corrections through the payroll than have to deal with the cost and time required to amend a P35 once it has been submitted to Revenue.

If correction to a P35 is required an employer can very quickly find they are in the self-correction and unprompted voluntary disclosure space which can be avoided if they make sure it is right now.

Employers should now take the opportunity to do an annual PAYE health check to ensure that their PAYE is being operated correctly.

Ursula Mathews is a Senior Manager with the Human Resource Services Group at PricewaterhouseCoopers in Dublin.

Email: ursula.mathews@ie.pwc.com