When HR meets the tax man

The HR Function in a modern organisation has to respond to many demands and work with a variety of other organisations. It might come as a surprise to those in HR to find that, increasingly, one of those organisations is Revenue.

In most organisations in the not too distant past, dealing with Revenue or with internal tax matters within a company was the preserve of the finance or tax departments or perhaps the payroll function when it came to employment taxes. These days, however, the role of HR in the tax arena has broadened so that now, in many organisations, the HR function has assumed primary responsibility for a range of employment tax matters (PAYE and PRSI in Ireland).

Although Ireland continues to officially rank as one of the easiest countries in the world in which to pay taxes[1], such a ranking will come as cold comfort to any HR person who has ever had to come face to face with the taxman. Even in the most compliant organisation the prospect of dealing with Revenue can be daunting, more so for many HR people.

Why HR?
There are a number of reasons why HR has assumed greater involvement in dealing with business taxation affairs. In part, increasing complexity within a company results in the dispersal of responsibility for different aspects of employee remuneration and benefits across the organisation (e.g. pension benefits, expenses, company cars etc). Also, with increasing obligations arising in tax law for companies to report these benefits or to ensure that accurate information is tracked, gathered and reported to payroll so that PAYE/PRSI can be operated, the responsibility for this tends to fall on the ‘owner’. When it comes to benefits outside of straight cash remuneration such as salary and bonus, this is typically HR.

So what does all of this mean for HR? The implications for HR of this trend are many and varied and carry with them tax risks that might be regarded as ‘old hat’ to the company tax manager. However, to a HR manager not familiar with the processes and obligations involved, minimising the tax risks can seem very daunting indeed. Probably the most significant implication for HR is the extent to which these responsibilities bring the activities of the HR function onto the Revenue radar where previously this was rarely the case.

Workforce rationalisation
Given recent economic conditions, an obvious example of more interaction between Revenue and HR is in relation to redundancy issues. Ensuring that the tax implications of their severance packages are properly understood by departing employees is a necessary part of the communications process which often falls on HR to deal with. However, of far greater concern is the risk arising from potential for PAYE or PRSI exposures from the incorrect calculation of exemptions applicable to the payments or the failure to properly address the impact on severance payments of current or deferred tax-free pension lump sums.

Impact of change
In many organisations HR has also been playing an increasingly central role in a wide range of change management and workforce rationalisation programmes. For example through the reshaping of workforces in the downturn, including the termination and re-engagement of employees under new terms and conditions, the re-engineering of remuneration structures to meet future corporate needs or the redesign of bonus structures to bring about change in the behaviours of those at whom a bonus plan is aimed. In all of these areas the need for communicating awareness of the tax implications of the changes and the revised structures introduced as well as the ability to manage them is critical. This is particularly important where agreements for change are reached through industrial relations machinery as, unless these issues are clearly addressed from the outset, any lack of clarity concerning who has responsibility for an unforeseen tax cost will typically rebound on the employer.

Mobile workers
The increasing complexity of tax law and practice in relation to internationally mobile employees is another area where tax risk and HR cross paths. Ireland has seen significant legislative change in recent years in this area which impact both individuals and corporations. Most recently in May 2010 the introduction of the new regime covering the social security treatment of mobile and seconded workers within the EU has taken effect. Apart from legislative change, there have been a number of recent developments in this area arising from Revenue interpretations of the rules in relation to international assignments and other inbound workers to Ireland. The change in Revenue approach has resulted in the need for even more careful structuring of the remuneration packages and work arrangements of internationally mobile employees to limit the risk of Revenue attack on the arrangements from a PAYE and PRSI perspective.

Apart from minimising the risks of getting things wrong, employers who can successfully navigate their way through the ‘tax maze’ can generate significant savings by taking advantage of any cost control opportunities which tax systems may offer in relation to international mobility – such opportunities can be incorporated into corporate international assignment and relocation policies which are generally the preserve of the HR function.

Salary sacrifice
Another area where tax risk can arise is in relation to ‘salary sacrifice’ – i.e. the foregoing of cash remuneration in favour of a non-cash benefit. This is typically seen in reward structures that include flexible benefit type arrangements or where bonuses are foregone in favour of an employer contribution to the employee’s pension fund. Again it is essential that HR, in implementing reward structures that include these types of benefits, are aware of and actively manage the tax implications.

Face to face with the tax man
Typically the actual meeting place where the activities of HR and the long arm of the Revenue come together is during a Revenue audit. This is quite a formal setting in which, once the audit has commenced, any errors made that give rise to a tax liability that has not already been disclosed to Revenue will result in tax, interest and penalty charges. In addition, and of greater concern to many organisations, is the potential for the employer to appear on the published tax defaulter listings – clearly something which all HR people would wish to avoid in order to avoid the reputational damage which could ensue.

Risk minimisation
To avoid such potentially severe sanctions it is essential for the HR function to be aware from the outset of the potential or actual tax implications arising from any of the remuneration and benefit structures, change programmes or other initiatives to be implemented.

HR, in conjunction with other appropriate functions in their respective organisation, should always be attuned to the potential for tax leakage and actively work together to manage the tax risks, whether they be strategic, operational, compliance or reporting risks.

All the necessary administrative structures to ensure that the appropriate tax treatment occurs at the right time and is appropriately documented should be implemented. In this way tax risks can be minimised and peace of mind for those responsible within HR can be assured.

Other benefits of HR involvement
Apart from minimising corporate risk, there may be other benefits for HR in having greater involvement in the tax affairs of a business. HR’s input to improving any systems and controls within the business can only be good for the profile of the function. In addition, employment costs generally constitute one of the largest expenses for many businesses, and any actions that HR can take to control such costs, including the associated taxes, should contribute to raising the credentials of the function and the people within it.