Introduction

Employers have dealt with significant changes to the PAYE system in recent years, including the application of PAYE/PRSI/USC to share based remuneration and the introduction of mandatory e-filing. As PAYE operates in “real time”, employers must implement changes “live” which is challenging in terms of adapting and implementing software changes and dealing with the impact on employees. The first of the 2012 PAYE issues dealt with in this article is an example of the challenges faced by employers.

PAYE is a system of collection and recovery of income tax on employment income. It is governed by legislation, mainly Chapter 4 of Part 42 Taxes Consolidation Act 1997 and the Income Tax (Employments) (Consolidated) Regulations 2001. PAYE extends to PRSI and the Universal Social Charge (USC), making employers responsible for calculation and collection of a major source of Ireland's fiduciary taxes.

Revenue issues guidance and instructions on the application of PAYE, in the Employer's Guide to PAYE, eBriefings and Revenue Leaflets.

Taxation of Illness Benefit (and Occupational Injury Benefit)

Illness Benefit (formerly Disability Benefit) is payable by the Department of Social Protection (DSP), to employees having sufficient qualifying PRSI contributions, who are absent from work through illness. Occupational Injury Benefit is payable where the absence from work is due to a work related injury. References to Illness Benefit in this article include Occupational Injury Benefit.

Both benefits are paid by the DSP without deduction of PAYE. Under Section 126 TCA 1997, Illness Benefit and Occupational Injury Benefit are deemed to be emoluments to which Chapter 4 of Part 42 TCA 1997 applies. This brings the benefits within the scope of Schedule E, PAYE.

The increase for a qualified child is excluded from the charge to income tax. Prior to 1^st January 2012, the first six weeks (36 days) of benefits were exempt from income tax. This exemption was abolished by Section 7 FA 2012 with effect from 1^st January 2012. Illness benefit is exempt from PRSI and the USC.

Application of PAYE to Illness Benefit Prior to 2012

Prior to 2012, employers were obliged, under PAYE Regulation 44, to adjust PAYE deductions on emoluments paid to account for PAYE on taxable Illness Benefit. This applied to Illness Benefit paid for a period in excess of 36 days. PAYE operated on a non-cumulative (Week 1 Basis) to any emoluments paid to the employees in the same period as the taxable Illness Benefit. Tax credits and Standard Rate Cut Off Points (SRCOPs) were reduced by the amount of the Illness Benefit.

If the employer did not pay a salary or wage during the period of illness, PAYE Regulation 44 stated that the provisions of Regulation 26 would not apply. This meant that the employee did not get a refund of PAYE due to buildup of Tax Credits and SRCOP when in receipt of taxable illness benefit. The amount of illness benefit payable was notified to employers by the DSP.

Prior to 2012, the employer could include the taxable Illness Benefit as pay instead of reducing the Tax Credits and SRCOPs.

Application of PAYE to Illness Benefit from 2012

In May 2012, Revenue issued its “Important Notice to Employers – May 2012”. The notice provides that:

• Employers are obliged to include Illness Benefit with earnings from 1^st January 2012.
• The option to reduce Tax Credits and SRCOP no longer applies
• 2012 Forms P60, P35L and P35L/T are to be revised to show a new dedicated field for taxable Illness Benefit.

This Notice caused difficulties for employers who had reduced Tax Credits and SRCOP in 2012 prior to the issue of the Notice. It would not be possible in such cases to provide retrospective details of taxable Illness Benefits for inclusion on revised 2012 forms P60 and P35L. Representations were made to Revenue in relation to the change, which was a departure from the method of reduction of Tax Credits and SRCOP as provided for in the PAYE Regulations (S.I. No 559 of 2001).

In some instances, employees who had their tax credits and SRCOP adjusted prior to May 2012 could have been taxed twice on the illness benefit, once when included as pay in payroll and again through reduction of Tax Credits and SRCOP. Revenue recognised the difficulties that would arise if the measures were applied retrospectively and provided transitional measures. The new instructions and transitional measures for taxation of Illness Benefit are covered in Revenue updates issued in July and August 2012 as follows:

• Revenue eBrief 37/2012
• Amended Notice to Employers – July 2012
• Employer's Guide to PAYE (Updated paragraph 7.11)
• Revenue Leaflet IT 22 August 2012

Transitional Measures

The transitional measures apply to employers who have decreased Tax Credits and SRCOPs to take account of taxable Illness Benefits. For 2012 only, these employers may continue with this method of taxing the benefits. Revenue will update these employee's records to show the amount of taxable benefits received.

New Measures

The taxation treatment for individuals in employment and in receipt of taxable Illness Benefit is outlined in TB 22 and in Paragraph 11 of the Employers’ Guide to PAYE.

Individuals in Employment

Tax will be deducted through the PAYE system where an individual is employed and in receipt of taxable Illness Benefit.

The employer will be notified of the amount of Illness Benefit by the DSP. If the employer does not have details of an employee's Illness Benefit, the basic personal rate of payment should be used until otherwise advised by the DSP.

Employers must include the amount of the taxable Illness Benefit as pay – apart from cases in 2012 that come within the transitional measures outlined above. The procedures to be followed by the employer will depend on whether the employee continues to be paid by the employer whilst on sick leave.

Salary continues to be paid to Employee-Illness Benefit is recovered by Employer

Revenue state that the employer will have the necessary details regarding date of commencement of illness and claim for Illness Benefit to include the taxable amount in payroll calculations. The employer is instructed to operate PAYE accordingly, without notification from the DSP.

USC and PRSI should not be calculated on the taxable Illness Benefit. It is charged on the difference between the salary and the taxable Illness Benefit.

Salary continues to be paid to Employee-Illness Benefit retained by Employee

The employer should include the taxable Illness Benefit with earnings. The cumulative PAYE system applies and the salary (or partial salary) paid is liable to PAYE. Only the actual earnings paid by the employer are liable to USC and PRSI.

Employer does not pay salary to employee who is on sick leave

The DSP will notify the employer of the amount of Illness Benefit. The employer should include this amount as earnings when the employee returns to work and the PAYE cumulative system applies.

Revenue Forms

Forms P60, P35L and P35L/T for 2012 will show earnings inclusive of taxable Illness Benefit and a new field for taxable Illness Benefit. Form P45 should include the taxable Illness Benefit in the Gross Pay figure and show it separately in section (d) of the form. Sections (e) and (f) of Form P45 (relating to reduced Tax Credits and Cut Off Points) should not be used in 2012.

Examples of calculating PAYE on Illness Benefit are in Paragraph 11 of the Employer's Guide.

Issues for Consideration by Employers

• Cases where the employer can continue with the reduction of Tax Credits and Rate Cut Off Point method of collecting PAYE for 2012
• Cases where employee could be “doubly taxed” in 2012 where Illness Benefit included as pay and tax credits/SRCOP also reduced
• Employer paying salary to employees on sick leave on a reducing basis. The payroll treatment will change if the employee is initially paid a salary which is reduced or not paid after a specified time period
• Payroll Software may need to be updated – taking into account the new Revenue forms
• Staff training to take account of the new procedures
• Revised P60, P45, P35L format
• Impact of the taxation of the first 36 days of Illness Benefit on the employees

What Happens in 2013?

The transitional measures will no longer apply after 2012. Revenue reminds employers in the Amended Notice – July 2012 that all aspects of Illness Benefit are being considered. This is a reference to proposals by the Minister for Social Protection to introduce a Statutory Sick Pay Scheme under which employers would be liable for sick pay for the first four weeks. A further notice to employers on the treatment for 2013 will issue at a later stage.

Universal Social Charge (USC) on a Cumulative Basis

The USC was introduced with effect from 1^st January 2011. Section 531AO TCA 1997 makes an employer liable to pay the USC on “relevant emoluments” which brings the USC within the PAYE system. For 2012 there are three rates of USC to be applied by employers – 2%, 4% and 7%. There are two main categories of employees to be catered for – those under 70 and those over 70 or having a medical card.

For 2011, the USC was collected on a non-cumulative basis. This meant that some individuals underpaid USC. The USC Regulations (S.I. No 685 of 2011) came into force from 1^st January 2012 and provide for a cumulative system, similar to the calculation of PAYE. Revenue gave notice to employers that the cumulative basis would apply from 2012 and the USC FAQs have been updated to take account of it.

The main changes introduced in 2012 are:

• USC Rate Cut Off Points apply– similar to the PAYE SRCOPs
• The USC rates and Cut Off Points are included in the Tax Credit Certificate
• Change of employment and emergency basis provisions apply -the USC emergency basis applies the 7% rate without a cut-off point
• USC is payable monthly and end of year returns must be made at the same time as the PAYE payments and returns – interest and penalties will apply for late payments
• Provisions are included for intermediate employers – similar to PAYE
• Employers cannot apply USC exemption or lower rate band, unless notified by Revenue
• Cross Border workers with entitlement to a medical card under EU Regulations must be issued with a medical card to qualify for the lower USC rate
• Employees with more than one employer can direct how the USC rate bands are to be split between employments

Revenue Forms P60, P45, P35L have been adapted to show the USC on a cumulative basis. The USC is to be included as PAYE on Form P30.

USC is due on gross pay and benefits (notional pay) before deduction of personal pension contributions. Employer pension contributions are not liable to the USC; however, an employer contribution to a Personal Retirement Savings Account is liable to tax as it is a benefit in kind chargeable under Section 118 TCA 1997.

PAYE/PRSI/USC Direct Debit Payments

Employers making payments by direct debit should review the 2012 payments to ensure that the payments are sufficient to avoid interest on late payment.

Whilst employers should review direct debit payments and their payroll software to ensure compliance with the cumulative system of USC, the changes introduced in 2012 have not given rise to the same difficulties for employers as the changes to PAYE on Illness Benefit have. This is due to the advance notification by Revenue of the changes, the publication of the USC Regulations 2011 prior to the change and the continuous updating of the Revenue FAQs.

Any changes in 2013 for employers, particularly relating to the proposed Statutory Sick Pay Scheme should allow for prior consultation with employers and advance notice and guidance from Revenue.

Patricia Quigley is Principal, Quigley Tax Consulting

Telephone: Dublin: (01) 4003620 Mobile (085) 7261945

Email: patricia@quigleytax.ie

Website: www.quigleytax.ie