When PAYE Modernisation was announced in the Budget 2017 speech on 11 October 2016, many employers saw the introduction of Real-time Reporting (RTR) in Ireland in 2019 as a distant and future hurdle. However, with the 1 January 2019 “go-live” date now less than four months away, practical preparations for RTR are moving to the top of the priority list for most employers. Previous Irish Tax Review articles have focused on Revenue’s preparations for modernisation and on the practitioner’s perspective on RTR. In this article we will discuss how it fits into the international tax compliance environment and examine some of the potential challenges faced by employers in implementing a compliant response to the introduction of RTR for PAYE.
Internationally, tax authorities are modernising, and this modernisation includes significant investment in technology and data analytics. Tax authorities have an expectation that taxpayers are also investing in technology and that the form of tax reporting should reflect the technology available. The aim is to minimise the tax compliance burden while maximising the benefit in terms of correct and timely Exchequer returns. RTR would not be feasible without appropriate technology, both for employers and for Revenue.
A number of countries have already implemented, or are in the process of introducing, real-time reporting in some form – whether for PAYE or other taxes. Real-time Information was implemented by HMRC in April 2013, and the Australian Tax Office introduced Single Touch Payroll on 1 July 2018. The Irish Revenue Commissioners have already implemented Real-time Reporting in respect of other taxes; for example, relevant contracts tax (RCT) has been subject to it since 2012.
It is likely that large multinational companies will already have experienced real-time reporting in some form, whether under another tax head or in another country. Such employers will already understand the importance of having an effective implementation plan well before the “go-live” date – and the importance of identifying and obtaining buy-in from relevant stakeholders in the business. However, we would caution employers against becoming complacent as a result of experience of real-time reporting in other jurisdictions, as RTR and similar systems, while underpinned by the same logic, may vary in key ways. Some key elements of Ireland’s RTR model that differentiate it from similar systems introduced in other countries are:
There is a certain overlap between the behaviours required of employers under RTR and those under the Director’s Compliance Statement and under the Large Cases Division’s Co-operative Compliance Framework. These three compliance mechanisms are driven by an increasing understanding by the tax authorities of the fact that tax compliance, in large companies in particular, needs to be underpinned by robust and regularly reviewed business processes. This is perhaps better explained in the negative: Revenue and other authorities have learned from experience that, although large taxpayers typically want to ensure that they meet all tax compliance obligations, those with poor internal processes and controls are more likely to have shortcomings. We are seeing an ever-increasing burden being placed on employers and taxpayers generally to compute, report and pay tax liabilities; act as collection agents for Revenue for certain withholding taxes; and even carry out regular self-reviews. Revenue enforces these obligations on employers by way of Revenue audits.
On the topic of audits, one of the fruits of Revenue’s investment in software and data analytics capabilities is that e-audits are becoming more frequent. Further development of e-auditing techniques will continue to allow Revenue to interrogate an organisation’s electronic records, making it easier and less labour-intensive for Revenue to detect non-compliance. Revenue is investing heavily in its data analytics capabilities and, by its own account, is aiming to have strong risk analysis operating from day 1 in relation to RTR. Revenue continues to dedicate significant resources to the preparation for RTR, with an Revenue continues to dedicate significant resources to the preparation for RTR, focusing on 'enhancing ICT capacity for data matching and analytics, and capability building. Revenue has confirmed that “all data received, including corrections and the timing of submissions, will feed into Revenue’s risk analysis systems”.
Under RTR an employer will be required to provide Revenue with an information return every time that it pays its employees, similar in detail to (but arguably more detailed than) what has up to now been included in the annual P35. The information upload to Revenue (called a Payroll Submission) must be completed by the employer either at the same time as or before the payment of emoluments to employees. Every payroll run must begin with a download of the Revenue Payroll Notification (formerly P2C), to ensure that employee tax credit information used is up to date in real time.
With the advent of RTR comes the abolition of all “P” forms, simply because the operations that they performed will be defunct under RTR. No P45 will be required to book a leaver’s proportion of the PAYE, PRSI and USC paid over in the year to date because Revenue will already have this information from the Payroll Submissions. Neither will a P35 be required. There will be no P60 because employees will now also have access to this information online, in real time, during the year, accumulating on a per-pay-period basis.
Although the P forms (P30, P35, P45, P46 & P60) will be gone, there will be new obligations for employers to deal with on a monthly basis. There will be a monthly obligation to file a statutory employer return. This will be submitted by the 14th of the following month specifying the total PAYE, USC and PRSI deducted from individual employees during the month. Shortly after month-end, Revenue will issue a monthly statement summarising Payroll Submissions made during the month. This statement from Revenue will be deemed the return unless the employer disagrees with and amends the statement before the deadline. Payment of all amounts due to the Collector-General must be made by the 23rd of that month (where the employer pays and files online via ROS).
With this fundamental change from a year-end reporting obligation to an upload to Revenue each payday, and the addition of an in-year statutory monthly return, employers will need to ensure that their payroll software is updated to facilitate the changes. Equally, there is an appreciation among employers, Revenue and tax advisers that preparing for RTR is not simply a matter of updating software. As Revenue itself has acknowledged in its report on the public consultation process for PAYE Modernisation, “there is a significant business process change and a change management exercise that will need to be completed before 2019”.
Actively reviewing the data that feeds into payroll, ensuring the accuracy and timeliness of that data, and identifying and implementing the necessary enhancements to processes to meet the requirements of RTR are a substantial and critical project for employers. This is because RTR will provide Revenue with increased visibility into organisations’ employment tax and payroll compliance operations. Revenue technology will likely be able to identify data anomalies and perform risk profiling of payrolls based on payroll uploads. It will also scrutinise factors such as the incidence of amendments and revisions. Revenue expects that RTR will enable it to engage in more focused and fruitful scrutiny and queries — “Timely Targeted Interventions” in Revenue parlance.
In practice, employers typically have payroll processes in place to ensure that PAYE is appropriately withheld on a full-year basis. This “payroll year-focused” approach typically processes standard pay items with normal frequency but may tolerate slight delays in the reporting of certain “off-payroll” items whereby “true-ups” are done on a semi-annual or annual basis. Such payroll processes may ensure the appropriate collection and payment of PAYE to Revenue in the year as a whole, but from 1 January 2019, RTR puts an additional onus on employers to do this in real time. Revenue has stated that “for some employers the focus on the end of year reporting may have contributed to in year payroll processing practices that are not fully in line with PAYE regulations. The real-time reporting regime will make these visible and such processes will need to change.” Instead, employers will need to have appropriate business processes in place to ensure that, to the greatest extent possible, the most accurate data on emoluments and benefits is transmitted to payroll during the period in which they are actually received/enjoyed by the employees. The Revenue Commissioners will be the evaluators of whether a business process is appropriate and sufficiently robust.
RTR raises the bar on payroll compliance, and the importance of achieving it, for all employers. Timing is the crux of RTR. With this in mind, RTR will pose an increased challenge for employers who have:
RTR should be relatively straightforward in relation to cash elements, such as salary paid out via the payroll. Challenges will be greater in relation to other benefits that generate a PAYE charge. Add to this mix the fact that another part of the business, or a third-party provider, may be responsible for the data. It quickly becomes clear that the employer’s payroll function will have a difficult task on its hands when it comes to ensuring that it has complete and accurate information for all employees, in time for payroll to run. This is particularly true when that turn-around time is weekly or fortnightly. There may also be a number of payrolls in operation, and these may be managed by different teams with different processes.
Particularly with large employers, there will frequently be a division of roles and responsibilities. A number of teams other than the payroll team may be responsible for providing information to payroll for processing. The increased pressure of RTR in relation to the real-time provision of this information is significant. It can be difficult in practice for the payroll team to receive accurate and complete information from other teams in the business (or third-party providers in some cases) on a real-time basis. Revenue has indicated that it will expect the organisation as a whole to be compliant and that it does not give allowances for the difficulties faced by payroll teams in achieving alignment with other stakeholders. Division of responsibilities can also make it problematic for an employer to start the process of preparing for RTR, as it can be difficult to achieve the required “buy-in” from all stakeholders, especially where another team’s performance goals may not be aligned with those of payroll. Education is crucial to ensuring that all stakeholders understand the role they play in, and the importance of, the business’s tax compliance.
Compliance with RTR is especially likely to pose difficulties in the context of shadow payrolls. Many larger employers find it difficult to determine whether a particular inbound business traveller will create a PAYE-able presence in Ireland. If so, there is a requirement to gather home-country payroll data plus details of locally provided benefits. There may also be a requirement to incorporate reporting feeds from relocation providers in relation to shipping, accommodation, utilities etc. The payroll frequency in the home country may also be different from that of the Irish payroll. Revenue has confirmed that it expects shadow payrolls to be reported in real time, which means that an RTR payroll submission is required before or at the same time as an employee is paid on a foreign payroll, even where that is off-cycle when compared to the normal Irish payroll.
Accurately calculating the Irish tax payable on salary and benefits-in-kind attributable to duties performed in Ireland is already a difficult task. RTR will serve only to increase this and make it extremely difficult for employers to comply in real time. Practitioners in this area of tax (including PwC) have provided feedback to Revenue on this issue as, despite the additional burden on employers to report, there would appear to be little value to Revenue of such earlier reporting, given that the cycle for payment of tax is not changing.
It will also be mandatory for employers to indicate to Revenue as part of the Payroll Submission which employees are shadow payroll cases. This will increase Revenue’s visibility of and ability to monitor the information reported for this particular category of employees – currently, Revenue does not receive this information. Revenue has advised that the shadow payroll marker will be used to inform Revenue analysis of these cases, with, hopefully, a more reasonable or flexible approach in relation to them. However, Revenue has been clear that there is no exception to the requirements of RTR in relation to shadow payrolls (such as with the UK’s Modified PAYE systems, for example). In addition, repeated adjustments to payroll submissions may serve to trigger Revenue’s risk analysis systems, resulting in Revenue’s questioning the robustness of the employer’s business processes, which could potentially lead to Revenue intervention.
Employers rely not just on different parts of the finance or HR team for data relevant to the PAYE calculations in payroll. In the case of some benefits, data may need to be submitted by the employees in order for the employer to tax the benefit appropriately. A common example of this would be company cars provided to employees where there is an element of personal use. Where an employer provides a company car to an employee, the employer is obliged to calculate the taxable value of the use of the car by reference to legislative rules that are based on annualised mileage levels. Under these rules, certain employees (such as sales representatives) may have high business mileage and therefore be entitled to a lower BIK rate than employees who are provided with a company car for home-to-work/personal use). Employers rely on employee logs of business mileage to determine accurately the appropriate valuation of the benefit-in-kind. Company cars are typically provided for the full year, and the distances for determining the applicable tax rate are based on the number of miles/kilometres driven in the calendar year. Many employers struggle to get their employees to maintain and submit accurate logs on a regular basis, with the result that the employer may include the highest BIK amount (or an estimate based on the prior year’s mileage) and then perform a true-up semi-annually or at year-end. Particularly for employers who process weekly or fortnightly payrolls, it would involve significant additional business process to request, obtain and review all employee mileage logs on a weekly/fortnightly basis.
Large employers may operate share ownership programmes aimed at remunerating employees with company shares. Where the employer is a multinational, such equity plans are typically administered on a global basis and are managed by an equity team either locally or abroad, in conjunction with a third-party broker. There can be a significant amount of administration involved in determining the number of shares to be awarded to an employee, the value of the shares for tax purposes and the relevant date for taxation of the shares. In addition, the scheme may allow for the sale of a portion of the shares to cover taxes payable by the employee. All of this information needs to be compiled, assessed and provided to the payroll team to enable them to capture the data and accurately report it to Revenue. Practically, it may take at least a number of weeks for all relevant data to be compiled, assessed and provided to payroll for processing. Employers will need to review their processes carefully to ensure that they are sufficiently robust to comply with the requirements of RTR.
Timeliness and accuracy of data are key to ensuring compliance under RTR. There will be an estimated 936 data points to be uploaded per employee per year (based on a monthly payroll cycle) under RTR, so employers need to understand what those data requirements are (available on the Revenue website, www.revenue.ie), compared to the data that they currently collect and retain for employees. Employers need to get to a position where they are satisfied that they have processes in place to capture and input relevant data, in the right format, to payroll on a timely basis.
Payroll processes and controls need to be sufficiently robust to ensure that payroll is right first time, every time. Although not new, the impact of processing incorrect information through payroll will be far higher, given Revenue’s visibility of any “catch-ups”, adjustments or corrections and the potential for penalties to be levied. With the advent of RTR, it is a good idea to take stock of the current payroll process, any elements of the process that are risky in terms of the likelihood of delay or breakdown, and any practices that are inefficient. Some employers’ payroll processes include reliance on the knowledge of one person or the use of manual files and processes. These will likely have an impact on the ability to ensure RTR compliance, given the high possibility that they will slow down information flows, and may lead to the need for corrections, due to the risk of human error.
To ensure a compliant response to RTR in the business as a whole, organisations will need to identify the key stakeholders in the payroll process and work to educate and then get buy-in for any required changes from these stakeholders. The education piece should instil an awareness of the impact that each team has on payroll’s being right or wrong. Education will also be required in the payroll team itself, where practices may have developed of accepting data late, not following up on PPS numbers for joiners, or relying on a year-end process as a catch-up on remuneration that should have been subject to PAYE during the year.
Employers will need to allocate appropriate resources to preparing for RTR. This will be particularly the case in January, when those responsible for payroll will be grappling with the new system while preparing the December 2018 P30 and the 2018 P35. Employers may also need assistance from professional advisers if they lack the expertise and/or resources to design and implement a compliant payroll process. Employers who outsource their payroll are not exempt from these requirements, given that what is provided to the outsourced provider is processed when it is provided. Such employers also have an exercise to complete in order to ensure that the process of collecting the data that they provide to the payroll provider, as well as the timing of when they provide it, is compliant with RTR requirements.
Where poor processes are identified before the introduction of RTR, employers will also need to have engagement from other teams in the organisation to ensure that process changes are implemented and maintained. This is best done by keeping open lines of communication so that stakeholders who have been identified as fundamental to the successful implementation of RTR understand the implications of a failure to comply with the new processes.
From a tax compliance perspective, more data equates to more tax risk. With less than four months to go until the implementation of RTR, it may be difficult to know where to begin in terms of identifying areas of non-compliance that require remediation. A good place to start is last year’s payroll. Was there a requirement to carry out any adjustments after a payroll period? Was there a year-end true-up? Have there been any amendments to the P35 as filed? If so, what was the reason for the change(s)? Is this an issue that is likely to crop up again this year/every year based on the current process? Would these adjustments be permitted by Revenue under RTR? If not, now is the time to change the processes so that they are fully communicated and instilled in the organisation before 1 January 2019.
In addition to preparing for the “go-live” date of 1 January 2019, there are some actions that Revenue has asked employers to complete during 2018 as part of their preparation. Revenue has asked employers to review their Employee List as against the P2C currently issuing from Revenue and to cease employments for anyone who is no longer an employee. To facilitate this on a large scale, and to ensure that other employee data (e.g. PPS numbers) in employer records is accurate, Revenue has built a facility in ROS to allow employers to submit their Employee List. Uploading the Employee List will enable Revenue to ensure that all employee information on its records is accurate and up to date before the introduction of RTR. It will also help to ensure that employees’ tax credits sit with the correct, current employment. Revenue has been accepting reports since June 2018 on a phased basis, but there is still time to action this now. Employers who wish to avail of this should undertake a data alignment exercise to ensure that their Employee Lists are correct, they have not omitted new joiners or failed to cease employments where necessary, and the employee information (such as PPS numbers) is correct.
Although it is clear that RTR is not merely about software, many employers use payroll software, which will need to be updated in anticipation of RTR. Instead of making available a full-size test system to all employers, Revenue has given access only to software developers and selected employers. Employers should therefore keep in close contact with their payroll software provider to ensure that software will be ready in time for RTR.
All employers have work to do in order to get ready for Real-time Reporting. Many employers have already begun this preparation. For those who have not, there will likely be an intensive body of work required in the next few months. The specifics of the preparation plan may vary depending on the employer, but the key requirements to bear in mind are timeliness, accuracy and quality.
Preparation should include a review to identify any corrective steps needed to ensure that the organisation is ready for RTR and a project plan to remediate any problem areas identified. This project should be started immediately (if not already under way) to afford employers the best possible opportunity of being RTR compliant come 1 January 2019. If this time investment is put in now, with new processes being maintained and monitored, employers should reap the benefits in terms of time saving, reduced payroll tax risk, and seamless, efficient payroll and PAYE tax compliance.
This article was first published in The Irish Tax Review 2018 - Issue 3, from the Irish Tax Institute in September 2018.
Senior Manager, PwC Ireland (Republic of)
Tel: +353 1 792 6518
Tax Consultant, PwC Ireland (Republic of)
Tel: +353 1 792 6040