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Thursday, 25th April 2024 |
| Employers are facing increased cost in providing employees with benefits in kind. The cost arises both in terms of PRSI and in terms of administration. The area may be the subject of a greater focus by Revenue auditors in the future. |
New burden on employers
From 1 January 2004 every employer will be obliged to calculate the value of the benefits in kind which he provides to his employees and directors. The employer will have to factor that value into the payroll system in accounting for PAYE and for PRSI.
How is this new?
Previously PRSI did not apply to benefits in kind. At a stroke, the cost of providing such benefits has increased for an employer by (usually) 10.75p.c. This tax increase is a straightforward tax on the creation and provision of jobs. With a logical tax system employers would receive tax incentives for creating and maintaining employment. In the perverse tax system, common throughout the EU, social insurance or PRSI represents a penalty for providing jobs.
There is also an impact on the employee. He too is exposed to the employee’s share of PRSI on the BIK, for the first time. However since employees’ PRSI liability is capped once the taxable income reaches €38,740, it would seem that for many employees no additional cost would arise. Those most likely to be affected are in fact lower paid employees who have not yet reached the income limit! It is difficult not to be suspicious that the Minister is seeking to administer harsh medicine in small doses. Is he hoping that the extension of PRSI to benefits in kind will be forgotten by next budget, on which occasion he might remove the cap on employees’ liability to PRSI?
Employers face a cost in ensuring that their payroll systems are redesigned to take account of the changes. Those who use ‘bought in packages’ for payroll purposes will find that there are no free lunches. The package providers’ additional cost in revamping his software will ultimately be borne by the employer in increased costs.
There is a risk that when employees discover the bite taken out of their pay packets they will seek compensation from the employer in the shape of higher than usual pay increases. The employer may end up not only bearing the employers’ PRSI cost, but indirectly, the impact of the employees’ PRSI cost where it is relevant.
Valuation of BIK
At present, other than for motor vehicles and preferential loans from employers, there is no fixed price list that may be used to value a benefit in kind. The value of each benefit in kind falls to be ultimately agreed between the employer and the Revenue. The valuation rules in relation to motorcars are quite complex and depend on business mileage and the extent to which the employee contributes to certain running costs of the car.
The Finance Act 2003 has introduced a wider range of pre determined valuation methods for benefits in kind.
Cars: The value of the use of a car for a year is taken to be 30p.c. of the value of the car when it was first provided by the employer. The percentage is reduced depending on business mileage and can reach as low as 6p.c. where business mileage reaches 30,000 miles per annum. The reduction for business mileage does not kick in until business mileage amounts to at least 15,000 per annum. These percentages are most likely to be of relevance only to the genuine ‘commercial traveller’ and will have little relevance to the average Joe Soap who uses his employer provided car for an occasional trip to a customer once or twice a week.
There are many aspects of the new rules that are not clear and will depend on the issue of regulations, later this year. One obvious instance is that an employer is not likely to know in advance what business mileage an employee will undertake in a year. How therefore is he to set up the PAYE system to withhold the correct tax over the course of a year? No doubt the regulations will deal with that. Equally, where an employee contributes to the running costs of a car it is understood that the Revenue continue to accept that the taxable amount in relation to the provision of the car falls to be reduced. The sum the employee contributes may vary over the year and is not always predictable in advance. Again it is expected that regulations will deal with that although it is thought that the Revenue are considering a refund system after the year end, rather than incorporating it into the PAYE system.
Van: The value of the benefit of being provided with a van by an employer is taken to be 5p.c. of the value of the van when first provided. Before everybody rushes out to convert their cars into vans, it is well to note that a van is defined as being a vehicle constructed solely or mainly for the carriage of goods, with a roofed rear area and without side windows or seating in that rear area.
Other assets: The rule relating to buildings provided to an employee (eg a house) remains unchanged. The benefit is valued at the annual rental value of the property. Rules relating to preferential loans are likewise unchanged.
The big change is that all other benefits in kind provided now have a valuation rule that values them at the cost to the employer (where the employer doesn’t acquire any asset) or where the employer acquires an asset and provides it to the employee, at 5p.c. p.a. of the value of the asset when it is first provided.
The big picture
There is a danger that an employer can react to changes in tax law in a piecemeal fashion. Some may focus on pensions one year, and in another year react to changes in rules relating to benefits in kind. It is important for an employer to take an overall view of the total cost of employing workers. The manner in which the worker is remunerated can include straight forward cash payments, share options, pension provision, benefits in kind, profit sharing schemes, to mention but a few. An employer will arrive at the best package for the employer, and for the employee, by reviewing all of these elements at a single time and understanding how they relate the value of the package as a whole to the employee, and the cost to the employer of the whole package. Few employers will have the in-house expertise needed to carry out such a review on their own. It requires taxation advice, a knowledge of pension law, a knowledge of the PRSI system and of VAT as well as experience in advising on integrated employment packages. KPMG can bring together such expertise.
The Revenue auditor
Anecdotal evidence would suggest that although employers had an obligation to report benefits in kind annually to the Revenue, some employers did not fully understand what constitutes a BIK. Reporting may have been inadequate in some cases. As the resulting tax liability was largely one for the employee, employers may have been rather relaxed about this. The new system places the tax liability squarely on the employer primarily. There is little doubt but that from 2004 onwards Revenue auditors will have quite a sharp focus on benefits in kind.
The necessity to revise payroll software before 1 January 2004, and the desirability of looking afresh at the total design of remuneration packages could be used to also do a comprehensive stock take of benefits in kind. From 2004 onwards any failure to fully identify the BIKs being provided, and correctly value them, will result in a tax bill and an interest and penalties bill, appearing on the employer’s desk. |
Robert Dowley is a partner in KPMG.
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| Article appeared in the May 2003 issue.
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