Employment Tax Audits has been saved
Employment Tax Audits
What to Expect
Revenue audits can be a daunting and stressful experience for any taxpayer regardless of the size of their business operation and employment tax audits can throw up challenges for taxpayers. This is because employment tax audits are much wider than just payroll and a pre-audit review will require input from stakeholders across the business such as HR, Finance, Accounts Payable, Tax, Procurement and Legal, to name a few. It is easy to see why, in our experience, it is the most commonly audited tax head, with cases leading to large yields for Revenue due to the high rate of tax applicable (circa 63%), as well as interest and penalties, and the potential for a gross-up of liabilities in certain circumstances.
With the move to real time reporting, Revenue now have up to date information, on demand, making their interventions more targeted, timely and fruitful.
If you have received a Revenue Audit Notification, you can expect that Revenue will focus on a number of areas including, but not limited to, the following:
- Contractors – they will examine things like the types of engagements in place (sole trader, limited company etc), any cross-border arrangements and whether there is a genuine contractor relationship with reference to the Code of Practice for Determining Employment or Self-Employment Status of Individuals. This issue is particularly topical, given the changing nature of the modern workforce, the rising popularity of contingent workers and use of the gig economy.
- Expenses – this is a complex area but some items to watch for include the reasonableness of expenses, are they in line with Revenue guidance and civil service rates? Are the rules being applied correct for things such as normal place of work and the “lesser of” rule? What is the company policy on entertainment, recognition awards, tolls, taxi’s, the use of credit cards? Is the company subject to a global expense policy and is this in line with the Irish tax rules?
- Directors – a review will usually look at the types of directors engaged, tax treatment of remuneration and expenses. Are there any nominee directors for which PAYE Exclusion Orders may be required, are fees mandated to third parties and how are these being treated for tax purposes? Where an Irish role is not remunerated is there a risk that Revenue could carve out a portion of normal remuneration of non-resident directors for Irish duties?
- Short term business travellers/expats – are there controls in place to monitor movements for personnel cross border and process and procedures established to flag any triggering of obligations in Ireland or abroad? Where have staff being working during the COVID period and are there any tax implications as a result of this? What is the company policy in relation to medium and long term assignments and have all items of remuneration been treated correctly for tax purposes?
- Termination payments – have all elements of the termination package, contractual and non-contractual, been treated correctly for tax purposes? Are any benefits being provided following termination and how are these treated for tax purposes? What exemptions have been applied and how have these been calculated? What controls are in place in relation to lifetime limits and reporting to Revenue?
- The taxation of the various reward and benefit items your employees receive – are real time reporting rules being followed in relation to cash, notional pay and equity? What benefits are being provided to staff and how are these benefits being treated for tax purposes? Some particularly topical areas include professional subscriptions, company vehicles, medical insurance, staff entertainment, the use of the small benefit exemption and the provision of third-party benefits.
The audit itself will be data driven, with a pre-audit meeting to understand the format of your data, and the use of e-audit techniques to interrogate and test your data to uncover possible exposures.
Under the current rules, where you receive a Revenue Audit Notification you can make a prompted disclosure, however timing is an issue as you typically only get 21 days notice prior to the audit commencement date, which can potentially be extended by 60 days, where you provide Revenue with confirmation in writing that you will make a qualifying disclosure before the expiration of the 60 days. It is possible, in limited circumstances, to apply for an extension to the audit commencement date, however Revenue are pushing back on this in our recent experience. As a result, the window for self-review, identification of exposures, quantification and disclosure is limited.
We encourage clients to take a proactive approach to compliance by ensuring that their house is in order before Revenue commence an intervention. The most comprehensive way to do this is to undertake a health check, not only for employment taxes, but under all tax heads. This will ensure that control deficiencies are identified early and rectified, along with any exposures and/or potential liabilities – by doing this entities can identify and understand their risk footprint, work with various stakeholders to assign responsibility and map out policies and procedures, and put in place a framework to manage risk, which is tested on an ongoing basis to ensure robustness. They also have time to consider their options in relation to any historic liabilities identified and they can benefit from the most favourable treatment provided for under the Code of Practice for Revenue Audit and Other Compliance Interventions.
Recent and Future Developments
The tax landscape is evolving, and Revenue are flexing to meet this evolution. Their current Statement of Strategy 2021 to 2023, in conjunction with their Corporate Priorities 2021, sets out their mission, vision and core values and their high-level objectives under their twin pillars of Service for Compliance and Confronting Non-Compliance. Their aim is to build on their advanced digital platform and PAYE Modernisation by designing innovative and dynamic systems which will position them as a leading tax and customs administration in the area of real-time activity and automated programmes. They have identified the need to refine and reprioritise their plans as necessary to respond to any unexpected challenges and they recognise that this is particularly the case as Ireland continues to learn to live with COVID-19, rebuilding the economy and managing the implications of Brexit.
We have already seen a number of changes in recent times in relation to their organisational structure, the introduction of real time reporting and the enhancements around the Cooperative Compliance Framework (CCF). In our experience this has led to efficiencies for Revenue and more targeted interventions, along with a trend of increase audit activity for companies who have met the criteria to enter the CCF but who have opted not to.
The latest development is in relation to the introduction of a Compliance Intervention Framework, which will overhaul the system for Revenue audits and other compliance interventions. Revenue is also commencing the development of changes to its IT systems to support this new framework, which is anticipated to come into effect in early 2022.
The framework will change Revenue intervention protocols, with activities such as CCF engagement and profile interviews (where a case-specific risk has not been identified) being Level 1 interventions, aspect query activity (now risk reviews) and audits being level 2 and investigations being level 3. Revenue has indicated that it will provide further clarity on the activities at each level in the Code of Practice, which is currently being revised to take account of the new framework. However it should be noted that the ability to make an unprompted disclosure under the new framework will be diminished and the need for proactive self-review increased as aspect queries will now be considered risk reviews, falling into the same category as Revenue audits, therefore suggesting that there will be no unprompted disclosures option for these types of reviews from 2022.
Revenue’s aim is to audit every company once at least every five years and with the introduction of the Compliance Intervention Framework, coupled with the increased focus on CCF engagement, gross up legislation, penalty regime for breaches of PAYE Regulations under PAYE Modernisation, enhanced access to real time information and technology this means that it is more important than ever that your entity is compliant and has the appropriate controls and procedures in place to minimise future tax risks.
At Deloitte we have a dedicated Tax Controversy team that specialise in assist taxpayers, companies and individuals with historic tax issues, or those who are seeking to ensure they are fully compliant with their tax obligations across all tax heads. The team can also help develop the appropriate controls, processes and procedures to ensure taxpayers meet their tax obligations going forward. Feel free to reach out if you have any concerns or questions or wish to discuss further.
- Debbie Jennings
Director in Global Employer Services, Tax in Deloitte Dublin who specialises in Employment Tax Audits.
A new electronic share scheme reporting obligation has been introduced. The deadline for reporting the required details for 2020 is 31 August 2021. In later years the filing date will be 31 March in line with the reporting for share options and various approved share plans.