Originally posted on Business Post 17 January 2021.
Last Friday, the office of the Revenue Commissioners made 2020 statements of account for several hundred thousand taxpayers available via its website. For many workers, this was not good news.
Between March 26 and August 31 of last year, 664,500 employees had their wages subsidised under the temporary wage subsidy scheme (TWSS). The PAYE system normally takes whatever taxes are due out of pay packets as wages are paid.
However, because of the way the temporary wage subsidy scheme worked, the PAYE system did not capture all of the tax due on subsidised wages. Further, because the collection of tax due on employer benefits was suspended, employees with company cars or subsidised health insurance will also owe tax for 2020.
Another cohort, people who were laid off because of the national pandemic response and received the Pandemic Unemployment Payment (PUP), will also face income tax bills.
At the height of the lockdown last year, as many as 600,000 people received the PUP. It’s an often overlooked reality that social welfare payments, with very few exceptions, are generally taxable. The PUP, paid at rates higher than the usual unemployment benefit, has left many more individuals with taxes owing for 2020.
In short, several hundred thousand workers now owe back tax from last year. This is a paradox because in another document published on the Revenue website earlier this month, the Revenue Commissioners noted income tax receipts of €22.7 billion for 2020. That compares to an income tax result of €22.9 billion published a year ago reflecting the outcome from 2019. How has it happened that in a pandemic year, with businesses closed for extended periods and unemployment numbers surging, national income tax receipts were virtually unaffected yet some people still owe money?
This is partly explained by an income tax policy pursued by successive governments irrespective of political hue. While the commitment to the 12.5 per cent corporation tax rate has been consistent, an equally consistent though less obvious policy has been to push more of the income tax burden onto higher earners.
In 2020, over 80 per cent of the country’s total income tax and USC was paid by higher income earners, those earning more than €50,000 per annum. Only one in four of the taxpaying population are in this cohort according to the Tax Strategy Group which compiles the options for government in the run up to annual budgets.
Figures produced by the Department of Social Protection and the Revenue suggest that it was mostly workers from traditionally lower wage – and thus lower income tax paying – sectors who claimed the PUP or benefitted from the TWSS. Hospitality along with wholesale and retail accounted for the majority of claimants and beneficiaries. While there may be greater demands on expertise and productivity, it appears that higher paying employment does not automatically carry with it a higher degree of risk to job security. This accounts for the strong national income tax receipts.
Those who lost their jobs or whose income was subsidised through the temporary wage subsidy scheme – and more recently the employment wage subsidy scheme where tax problems do not arise – were those who were paying relatively low amounts of tax at the standard rate of 20 per cent. In very many cases, it is this same cohort who are now facing tax bills. And this outcome has several implications.
Firstly, the government will have to explain that this is tax which is correctly due. That’s a hard ask because the bills will come as a surprise to many. Were the Revenue and the Department of Social Protection sufficiently forthright to the general public about the tax consequences of the subsidies and payments as the schemes were launched? In the vast majority of cases, the tax bills will be relatively small, in the order of hundreds rather than thousands of euro. But few things sting like a tax demand.
Secondly, most of the workers affected will not be used to dealing with the Revenue directly, as their affairs are handled by their employers via payroll. Most will, and should, opt for the back tax to be collected on the drip over four years through the PAYE system. This lingering tail of back tax over the next four years will either dilute the benefit of future tax cuts, however unlikely, or accentuate the impact of future tax increases.
Thirdly, some cases can only be successfully resolved by the worker filing a return of income, and a universal obligation to file income tax returns is now a real prospect for the future. Up to now the legal obligation to file a return has been largely confined to the self-employed and businesses. Additional bureaucracy may be a lasting legacy of the pandemic.
The only saving grace is that the position of everyone, not just the direct beneficiaries of TWSS and PUP, would have been much worse if the subsidies and payments were not introduced. TWSS and PUP supported business activity while bolstering consumer spend. The tax problems they are causing are a by-product of how rapidly they were introduced.
That, however, may be cold comfort to those seeing their tax statements of account this week.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland