A summary of some of the recent guidance issued by Revenue and other topical tax matters.

One feature of the current Irish tax landscape is an increase in the amount of guidance, often lengthy and detailed in nature, which is issued by Irish Revenue on various matters. The purpose of these releases is to provide practical guidance on Revenue’s interpretation of new tax legislation or, in certain cases, revised guidance in respect of older legislation. This article summarises some of the recent issues from Revenue, as well as other topical tax matters.

Business travellers/short-term assignees

The taxation of business travellers and foreign employees temporarily assigned to work in Ireland has been the subject of much coverage recently, following the publication of guidance from Revenue on the topic. The guidance covers the taxation of foreign employees who come to Ireland to work for a period of time, often for a small number of days.

In certain circumstances, workers employed by a foreign employer and working in Ireland for short periods – from the UK, for example – were protected from double taxation by our tax treaty. However, on the basis of the new guidance, a UK individual spending more than 30 days a year in Ireland will in many cases result in a PAYE withholding obligation for the employer. At a minimum, this will create significant additional administrative requirements on both companies and business travellers/short-term assignees.

Companies potentially impacted by the above will need to carefully examine the guidance from Revenue to ascertain whether they could fall into the PAYE net. Unfortunately, this won’t always be clear as a result of the slightly subjective nature of some of the terms in the guidance. In addition, the PAYE modernisation regime – which comes into effect on 1 January 2019 – means time will be of the essence in reporting PAYE, where required, and applying for specific exemptions, where available.

Re-grossing of payments that have been missed for PAYE purposes

‘Re-grossing’ is designed to address a situation where an employer makes a payment to an employee or director, but fails to deduct and remit the tax due under the PAYE system. Finance Act 2017 introduced legislative provisions in this regard, with a manual recently issued by Revenue on the topic.

Imagine a situation where an employee receives a benefit of €100, which should have been subject to tax through PAYE but wasn’t. When rectifying the matter, should the employer treat the €100 as a gross payment and deduct tax accordingly, or should the €100 be treated as the net amount the employee received, with PAYE applying to the
re-grossed amount?

In the past, in certain situations, the position to adopt wasn’t clear with the potential for significant variations in the tax liability if Revenue and the employer adopted different positions. The purpose of the new legislation and guidance notes is to remove this ambiguity.

Per Revenue’s recently published manual, the circumstances where re-grossing apply are where there is a total non-operation of PAYE by an employer in respect of emoluments paid to an employee (all payments paid gross, for example) or an employer disguises the payment of emoluments – for example, payments from cash sales that are omitted from the employer’s books or records.

Broadly speaking, no re-grossing applies where there is innocent error. An example in the Revenue manual refers to an employee who occasionally takes a taxi to work and the employer reimburses the employee for the cost of the taxi. Where Revenue is satisfied that this is an innocent error by the employer, re-grossing should not apply.
Historically, re-grossing was not generally required in practice on “normal” benefits-in-kind. Whether these will be accepted going forward as an “innocent error” is unclear.

Implications of Finance Act provisions for management buy-outs and similar deals

One of the more controversial elements of the 2017 Finance Act was an anti-avoidance provision that impacts transactions where reserves of a target company are ultimately used to pay the vendors of the target. In a typical management buy-out (MBO) situation, a special purpose vehicle (Bidco) might be established by management to acquire the target business from the vendors. A dividend could be paid by the target to the Bidco on closing to enable the payment of the purchase consideration to the vendor by the Bidco.

Prior to Finance Act 2017, the sale of the shares in the target would have been subject to capital gains tax (CGT) in the hands of the vendors. Post-Finance Act 2017, the element of the consideration that was sourced from reserves in the target could instead be taxed as a distribution at marginal income tax rates.

Guidance on the matter has issued from Revenue, with some limited examples. The guidance confirms that bona fide situations are not caught under the new provisions, although the legislation contains no such “get-out”. The broad thrust of the guidance is that, if the reserves are sourced from the target as part of an arrangement between the vendor and the purchaser, then distribution treatment may apply. The new provisions are potentially far-reaching and could create uncertainty in many “normal” deal situations. It is a point that needs to be considered in transactions that may fall within the remit of the new legislation.

EII update

Unfortunately, there remains a backlog of cases with Revenue where approval for Employment and Investment Incentive (EII) relief is sought. This appears to be down to a combination of the new EU Block Exemption rules and stretched resources in Revenue.

While additional Revenue resources have been allocated to clearing the backlog, in our experience there is still a significant number of old cases awaiting attention. This isn’t ideal, particularly when EII is one of the key non-bank methods available to small business for raising finance.

The idea of moving EII to a self-assessment basis has been mooted, which would at least enable relief to be obtained by investors at the outset. So, lots going on and only four months to the next Budget and Finance Bill!

Peter is Tax Partner at Grant Thornton.