As many of you will be aware, a new PAYE system will come into effect from 1 January 2019. This has become known as PAYE Modernisation. In effect, all employers will have to deal with payroll taxes in real time.

One relatively important offshoot of this legislation, which has gone relatively unnoticed, is a change to how Revenue deal with the underpayment of payroll taxes. This change has come into effect on 1 January 2018 as opposed to the main changes which will come in to effect on 1 January 2019.

Employers who fail to operate PAYE correctly will be liable, on a grossed up basis, for the PAYE liability that should have been withheld on the employment income. This is easier to explain by way of an example:

In 2017, if an employer had paid for a private holiday for a director or employee in the amount of €2,000 then once Revenue had found the indiscretion they would generally charge PAYE of €1,000 plus interest and penalties. From 1 January 2018, the employer will be liable to additional PAYE of €2,000 plus interest and penalties. In other words, Revenue will deem that the employee received a €4,000 benefit, paid tax of 50% on it and therefore had €2,000 left to pay for their holiday.

In addition to this, Revenue now have the power to levy a penalty of €4,000 where an employer fails to operate PAYE correctly.

We do not know yet whether Revenue will impose the above new pieces of legislation in every case. It is our understanding that the new measures will only be used for persistent abusers of the system. However from experience, once Revenue bring in new powers they don’t take long to become normal practice.

Now is a good time for employers to reassess their tax free payments to staff and if they have any doubts about them, they should discuss the issues with their accountant.