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Employment tax: Revenue audit challenges in 2021

21 May, 2021

Revenue’s investment in data analytics means that they are now better placed to identify non-compliance as they carry out more granular audits. As their aim is to audit every company once at least every five years, employers need to ensure the controls and processes supporting their employment tax compliance are fit for purpose to avoid a potentially costly tax settlement.

An Employment Tax (or PREM) audit is the most likely audit an organisation will face. It can result in significant settlements for non-compliance, particularly for large employers. 

For example, for every €10,000 of non-compliance identified in a PREM audit, a settlement of €6,305 (before interest and penalties) will arise. Companies will also need to review whether issues identified may have been recurring in other years. 

PREM audits are much broader than payroll with Revenue focusing on:

  • Off payroll areas.

  • An organisation’s data.

  • The processes and controls in place to support employment tax compliance.

Aerial view of the Dublin city on a cloudy day.

Off-payroll risks

The key off-payroll risk areas that will be interrogated and which can give rise to large settlements are:

  1. Contractors.  

  2. The reimbursement of business expenses.

  3. Rewards and benefits.   

  4. Expats and short term business visitors.

  5. Severance payments. 

  6. Tax treatment of directors. 

Data Focus

In auditing the above risk areas, Revenue will request extensive data downloads from in-house financial systems including:

  • Payroll gross to net reports.

  • Full payments listing.

  • Purchase invoice listing.

  • Complete download of the expense system.

  • Company car listings.

  • General ledger and trial balance listings.

Revenue will usually request that this data is uploaded to their secure portal at the start of the audit. Revenue will then apply data interrogation and data analytics tools to identify anomalies and inconsistencies that could indicate an underpayment of employment tax. 

Documentation

It is crucial to have documentation in place to support the tax treatment adopted in respect of these risk areas. Revenue will place significant weight on the quality of record keeping as regards the likes of expense claim forms, receipts, business mileage logs and contractual agreements etc. Any deficiency in the above is likely to result in a settlement unless an evidence-based defence can otherwise be established.     

Pre-audit meeting

A pre-audit meeting before the commencement of the audit may also be requested to discuss the format of any data to be provided to Revenue. Preparation for any pre-audit meeting is vital in terms of the sample data that you provide. This should be sense checked in conjunction with your employment tax advisor before it is handed over. 

Real time reporting

Employers should be aware that Revenue will already have access to significant data by virtue of Real Time Reporting, which they will have analysed through their risk profiling system to identify trends or anomalies that might indicate an underpayment of tax. Equally any Share Scheme returns will have been analysed by Revenue in advance of the audit.

Employment tax oversight

In our experience, the most effective audit team structures will typically see the wider tax team take the lead in managing the audit process and the interaction with Revenue. However, the following business units also have important parts to play in ensuring compliance and should be aligned, feeding into the overall tax control framework: 

  • HR - with responsibility for salary, bonus, severance cases, share awards.

  • Finance - with responsibility for expense reimbursements and company credit cards.

  • Infrastructure - with responsibility for managing the company car fleet and fuel/toll cards.

  • Procurement - with responsibility for engaging contractors.

  • Payroll - whose responsibility is to process the instructions received from HR and or Finance.

Policies and procedures

At the outset of the audit, Revenue will assess the robustness of a company’s controls and processes. Where deficiencies are identified, it will most likely lead to a more invasive and time consuming audit process.

As such, it is critical that policies are implemented across all employment tax areas (e.g. reimbursement of business expenses, tracking of business mileage for reduced rate BIK on company cars, professional subs, team lunches/dinners etc). These policies should be communicated to all employees so that they are aware of their obligations in ensuring the organisation remains tax compliant. 

In our experience, PREM settlements  typically arise due to process and control deficiencies relating to payroll and more increasingly off-payroll areas. As such, this area warrants significant attention.

The key considerations to keep in mind now

What can organisations do now to avoid a costly PREM settlement?

Regular review of controls

It is important that organisations have an awareness of their PREM risk footprint. They need to ensure that processes and controls are in place to manage these risks.

These processes and controls should not be static. As tax law and Revenue practice in the employment tax area is frequently changing, it is critical that ongoing testing (at least twice yearly) is undertaken to ensure controls are being adhered to and remain fit for purpose.  

Independent testing

Many organisations will look for external validation of their preparedness for a PREM revenue audit. This may involve deep dives into one or two specific areas each year, such as pensions, share plans, expenses and directors. Such reviews can also facilitate recommendations as to how existing controls can be enhanced. In the event of a subsequent audit, these reviews are looked upon favourably by Revenue and provides assurance as to how seriously employment tax compliance is taken within the organisation.

Alignment of stakeholders

It is important to ensure that all internal stakeholders who play a role in PREM compliance are aligned. The role of the tax function is crucial in defining roles, responsibilities and processes for all of those involved. This will ensure that your organisation is ready if you receive a PREM audit notification. It should give you the best opportunity to identify risks on a timely basis and avoid a costly tax settlement and the risk of publication as a tax defaulter. 

We are here to help you

Revenue audits are complex, high risk and time and resource consuming.  It’s not a question of “if” but “when” will your business be audited.  

Our Tax Risk and Controversy team helps our clients deal with Revenue interventions and all aspects of Revenue audits. Our focus is on helping them manage their tax risk, both prior to intervention or audit, as well as when Revenue formally intervenes.   

To talk to us about Revenue audits and any concern you might have around risks in your business, please contact any member of our team today.

Contact us

Pat Mahon

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6186

Emer O'Sullivan

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6695

Aidan Lucey

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5833

Danielle Cunniffe

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6262

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