Supporting the System

Feb 11, 2019

The Sunday Business Post, 10 February 2019, Governments love PAYE.  Most workers are caught in the vice of the PAYE system. 

Not only is the yield predictable but PAYE tax hits the government coffers in a steady stream during the year.  It doesn't come in in big unpredictable lumps like corporation tax payments or income tax paid by the self-employed.  As this week's exchequer returns showed, it is a major component of the total tax take (in Ireland's case about 25% of the total) and therefore must be jealously guarded.  This is a large part of the reason why the Irish PAYE system was “modernised” in the last few weeks.  More employers now have to provide more information in more structured ways, using new upgraded payroll systems.  For smaller employers in particular, PAYE modernisation has had genuine nuisance value with little or no commercial benefit for them.

If you are an employee of almost any description, the PAYE rules apply.  The obligation falls primarily on the employer to make sure PAYE is properly accounted for and paid over.  So tight are the rules that it is virtually impossible to wriggle out from under them.  But that hasn't stopped people trying, and one of those attempts in particular is causing significant grief in Britain at the moment where the PAYE rules are very similar to those which apply in Ireland.

The gist of a UK tax planning scheme currently in the news is that, instead of paying money as wages, a complicated offshore structure was set up which provided the individual with loans instead of wages or salaries.  While wages are always taxable under PAYE, monies advanced via a loan are not.  As an employee, or even as a deemed employee, a loan isn't much good to you if there is an obligation to pay it back.  However the terms of many of these loans were such that the debts were unlikely ever to be repaid.

If you take tax payable at rates of up to 50% or more out of the equation, such schemes become highly attractive.  Add to that the sidestepping of social insurance contribution obligations, known as national insurance in the UK, (a heavy debt for many employers), the apparent benefits to everyone except the British Exchequer are enormous.  A cottage industry sprang up in the UK to organise and facilitate these arrangements, with promoters taking a fee of as much as 20% per annum to set up the loan structures and keep all the paperwork and so on in place.  The schemes were apparently particularly attractive in the IT industry, which makes extensive use of subcontractors.

For the PAYE system protection reasons I outlined earlier, the UK revenue authorities took a very dim view of these arrangements.  In Budget 2016 the UK announced that the law was to be changed with effect from 6 April 2019 to make it clear that these loan arrangements would no longer be effective for tax purposes and that redress would be sought via the imposition of tax, interest and penalties under the loan charge legislation.  The 2016 announcement created what in effect was a three-year opportunity for people to sort out their tax arrangements before the new legislation kicked in from April 2019.  The individuals had to either repay the loans they received from schemes (an impossible task for many given that some of these schemes had run for almost 20 years) or come to a settlement with the UK revenue.  It's reported that about 25,000 individuals have gone down the settlement route, but a large number have not.  When the three-year window closes in April, the total cost of final settlement arrangements could result in a tax charge at an effective rate of almost 80%.  That doesn’t leave people much to live on.

Although drowned out somewhat because of Brexit chaos, there is debate in the UK over whether this UK revenue authority tactic is fair to the individuals involved.  The crux of the fairness argument seems to be that these individuals were engaging in tax avoidance (which is legal even if not acceptable or effective) rather than tax evasion (which is illegal), yet the settlement terms are more comparable to those which apply in evasion cases.    Another strand to the argument is that usually it is employers rather than workers who should come under scrutiny where there have been attempts to avoid PAYE. 

The House of Lords Economic Affairs committee got in on the act and in a report at the end of last year criticised HMRC for treating individuals unfairly.  The UK revenue authority HMRC seems to believe that it is right to take the action it is taking as people should have known what they were doing wasn't normal and carried a risk.  Nevertheless, in the face of growing political pressure, the British government has signalled in the past few days that the approach being taken to tackle these schemes will be reviewed.

There are points to be drawn from this episode for taxpayers and administrators alike.  For taxpayers, if a tax dodge is too good to be true, then it probably is.  But for tax authorities, if their action to tackle tax default comes across as too harsh or aggressive, they can't count on the unwavering support of the political system.  That’s the case, no matter how much a government might love the tax.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland