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| The extension of PAYE and PRSI to benefits-in-kind is scheduled for 1 January 2004. The present indications are that it will not be postponed. Not all employers know that they are facing additional tax cost, administrative costs and confusion, and potential industrial relations problems. |
In the 2002 budget the Minister performed one of the favourite tricks of a Minister for Finance. He announced some bad news that wouldn’t come into effect for a year. Deferred bad news doesn’t seem that bad, and when it actuually comes into effect you tend to forget who to blame.
There has been very little public consultation about the extension of PAYE and PRSI to benefits-in-kind. The necessary detail of the proposed regime has been published so late that it will present serious problems for many employers. Despite this indications to date suggest that the government will not defer the implementation of the system. There is of course a good reason for this. The new system will yield extra taxes.
The extra taxes
In principle applying PAYE to benefits-in-kind should not result in extra taxes. They are already liable to income tax. Some were collected by restrictions of tax credits in the PAYE system and others are collected by assessment. The reality is that the extent of benefits-in-kind was poorly appreciated by employers and employees and may have been under reported in many instances. The application of PAYE, subject to Revenue audit, is likely to increase the tax yield.
PRSI did not previously apply to benefits in kind. The practical effect of the extension is to increase the employer cost of providing such benefits by 10.75p.c. That is a direct additional cost of employing labour.
In addition to amending the method of collection of income tax by applying the PAYE system, the method of valuing benefits-in-kind for income tax purposes has been changed. The change in valuation method will yield winners and losers.
Sharper focus
The Revenue have issued guidelines on the operation of the new tax. Hitherto taxation of many benefits-in-kind was the subject of a mixture of published ruling and informal rulings and concessions from the Revenue. This has now been apparently swept away with clear statements of what constitutes benefits, and how to value them.
Amongst the items which the employers guide identify as being potential benefits-in-kind are provision of mobile phones; en bloc payment of benefits; exam awards; staff discounts; Christmas parties and social functions; payment of professional subscriptions; staff suggestion schemes; voucher schemes; provision of sports and recreational facilities; company cars and vans; employer provided accommodation; personal use of company owned assets; and benefit of preferential loans.
Not quite every potential benefit for an employee is within the regime. Subject to conditions, the payment of relocation expenses, the provision of travel passes, the provision of a staff canteen, work related training, long service awards, health checks, cr?che facilities, pension provision, and life and disability cover are generally excluded.
It is understood that the provision of computers and ISDN lines to employees to facilitate working from home will not be regarded as a benefits-in-kind.
The provision of car parking facilities is also left out of the new regime. The Minister for Finance has been attempting without success to extend the benefits-in-kind regime to employer provided car parking. To date the Civil Service have discovered insurmountable obstacles to this proposal. The State is one of the largest providers of car parking facilities to employees.
The human angle
It is quite possible that the application of the new system will not only increase employers’ PRSI but will result in reduced take home pay cheques in January 2004. If employees do not have this clearly explained to them, it would not be surprising if there is discontent.
Employers face the need to fully identify the range of benefits provided to employees, many of which the employer is no longer conscious of, and many of which the employees take for granted and do not even regard as benefits. Once identified, the employer must determine whether or not they fall within the new regime. The employer must determine which employees receive which benefits, to what degree, and how those benefits will fall to be valued. Then the employer is faced with the need to amend his payroll systems and consult with the employees.
Where the new system is not correctly operated and under payment of tax results, the employer carries the can, complete with interest and penalties. The time allotted to employers to adjust to the new system has been wholly inadequate, given that the Revenue Guide was published only in October. Although it does not seem likely at the time of writing, let us hope that good sense and the Christmas spirit influence the Minister on budget day to defer the operation of the system. |
John Bradley is a partner in KPMG.
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| Article appeared in the November 2003 issue.
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