This article was first published in the February 2011 Ireland issue of Accounting and Business magazine
PAYE and PRSI are the largest tax liabilities of most companies, yet they are frequently managed by unqualified staff, who are given little or no training or support. In addition, given the operation of PAYE/PRSI has never been more complex, it makes the two most common mistakes made by employers even more difficult to explain. These are: (i) to assume that the operation of a payroll system is straightforward and (ii) to assume that having an excellent payroll software package is a guarantee of success. In fact, most employers place too much reliance on their payroll software, a blind faith that is seriously misplaced.
Even the best software package, fine tuned to the Irish context and entirely up to date, cannot be operated successfully unless the operator is trained, not just in the use of the software, but in the operation of the PAYE/PRSI system. There are numerous excellent payroll software packages available in Ireland today and many are excellent value for money, but the principal function of all payroll software is to process calculations and to produce reports in the form of payslips and employer returns. It is the payroll operator who makes the important decisions and, once these decisions are made, the software will process the calculations and produce the necessary reports. Without the operator’s expertise, payroll software cannot operate efficiently. The following are a sample of some of the issues a payroll operator has to deal with that no payroll system can deal with alone.
PRSI classification of directors
The PRSI system is far more complex than most people realise. Until recently, the PRSI system and the employee health contribution levy were treated as a single deduction and the rules were difficult to understand. The recent changes, whereby the employer health contribution levy (and the income levy) have been abolished, has certainly made the PRSI system easier to understand, but problems and mistakes still arise. For example, the amount of PRSI payable by an employee is dependant on their PRSI classification and the level of their income in a pay period. So, the first task a payroll operator has to complete is to determine the employee’s PRSI class. However, it is not the employee who is classified for PRSI purposes, but the income of the employee.
The PRSI classification for company directors is a common mistake. Many believe that all directors are PRSI class S or that, if they own 15% or more of the shareholding in the company, that their PRSI class is class S, but this is not correct. PRSI class S only applies to self-employed individuals and Revenue and the Department of Social Protection only regard a director as being self-employed if he or she owns or controls, directly or indirectly, at least 50% of the shareholding of a company.
The confusion regarding the 15% shareholding arises because the PAYE tax credit, currently €1,650 per year, is not granted to proprietary directors (or to their spouse or children) in a company. A proprietary director is defined in tax law as a director who owns or controls more than 15% of the ordinary shares of a company from which he or she receives a payment. However, this 15% shareholding rule has absolutely no bearing on the determination of the PRSI class of an individual.
In a partnership consisting of three equal partners, each will pay PRSI at class S. However, if the partners form a limited company in which each partner holds 33.3% of the company shares, each partner will then become liable to pay PRSI at class A rather than at class S, because none will have a controlling interest in the company. There have been situations where this point has been successfully appealed, but the Department of Social Protection (which Revenue defers to in regard to the PRSI classification of employees) does not accept the principle that such partners should continue to be classified as PRSI class S.
Non executive directors
Non executive directors are not employed under a contract of service and such directors, whose only function is to operate as a director and who have no contract of employment with the company, are regarded as being class S for PRSI purposes in respect of directors’ fees from that company.
All directors’ fees, whether payable to proprietary, nonproprietary or nonexecutive directors, are subject to PAYE. Invoices submitted in respect of directors’ fees by directors who are self employed in another capacity should be ignored and PAYE/PRSI should be operated on these payments. The number of directors who are incorrectly classified as PRSI class S is extremely high, as is the number of directors who receive director’s fee gross, without deduction of PAYE/PRSI.
Taxable payments to directors
The operation of PAYE on payments to directors is also another common problem area. While directors’ salaries and directors’ fees are clearly subject to PAYE/PRSI, numerous problems arise in respect of other payments to directors.
For example, many directors and, indeed, managers have their home phone bill paid by their employer. The justification for this is usually, that the director or manager has to be contactable outside of normal office hours, or that he or she sometimes works from home. That may well be true, but it doesn’t justify the payment of what is essentially a private bill by the director’s employer.
Revenue used to allow an employer to treat 50% of the home phone bill of a director or manager, paid by the employer, to be regarded as a legitimate business expense and the other 50% to be regarded as a taxable benefit in kind, provided the employer could show some justification for the payment of what was essentially a private bill. Recently, however, Revenue changed its practice in relation to such payments and it no longer allows a standard 50% of the home phone bill to be regarded as a business expense.
Revenue now require an employer to justify any part of a director’s or manager’s home phone bill, which is paid by the employer, and the balance is to be treated as a taxable benefit in kind. Where such justification cannot be provided, or does not stand up to scrutiny, then the entire payment is regarded by Revenue as a taxable benefit in kind. Furthermore, where the tax payable on the benefit in kind is paid by the employer, Revenue will calculate the value of the taxable benefit in kind, not as the value of the bill paid, but as a regrossed value which, after deduction of the relevant PAYE, PRSI and Universal Social Charge, will give a net figure equal to the value of the bill paid. This regrossed figure can be as much as 200% of the actual bill paid.
Benefit in kind
The payroll operator has to quantify the value of any benefit in kind which is to be subject to PAYE/PRSI and the USC. The rules for the calculation of a benefit in kind in relation to company cars and vans can be complex, particularly where there is a change in the vehicle used during the year. This requires specific calculations that no payroll software can deal with, without the specific input of trained personnel.
The calculation of the value of a benefit in kind relating to a company van is quite different to company cars. However, more of a problem is knowing when the use of a company van is not liable to a benefit-in-kind charge. In order to be exempt, the use of a company van must meet four specific conditions:
- The van is supplied by the employer to the employee for the purposes of the employee’s work;
- The employee is required by the employer to bring the van home after work;
- Apart from travelling from work to home and back to work, other private use of the van by the employee is forbidden by the employer, and there is, in fact, no other private use; and,
- In the course of his or her work, the employee must spend at least 80% of his or her time away from the premises of the employer to which he or she is attached.
Where an employee is in receipt of a taxable benefit in kind and there are 53 paydays in a year for a weekly paid employee (27 for fortnightly paid, or 14 for 4 weekly paid), something that occurs regularly for every employee, then there should be no benefit in kind charge on the 53rd payday, because the full value of the annual benefit in kind has been charged to tax in the first 52 paydays. Payroll software doesn’t know how the value of a benefit in kind is calculated, so unless the payroll operator understands the rules and calculations, the employee will overpay PAYE and PRSI and the employer will overpay PRSI.
As and from 2011, any payment of professional fees by employers, in respect of their employees, are no longer regarded as a tax deductible expense of their employment and any such payment of professional fees, by an employer, is now a taxable benefit in kind. This means that the employee has to be assessed to PAYE, PRSI and USC on the value of the fees paid by the employer and, if the employee does not pay the PAYE, PRSI and USC due, the employer is liable for PAYE, PRSI and USC on the regrossed amount, which, after the normal deductions, leaves a net figure equal to the fees paid. Is this being handled correctly in your company?
Even the best payroll software system in the country is merely a tool designed to assist the payroll operator and, unless the payroll operator is suitably trained and qualified, software cannot make up for the deficiencies of the operator. Are you satisfied that the person responsible for the management and administration of your company’s largest tax liabilities is suitably qualified?
Eamonn Corcoran is CEO of IPASS