A popular question we get asked a lot is how to negotiate the mine field that is tax refunds for employees. Who in the world has to pay it?
There could be a number of reasons for having to refund an employee’s tax. Maybe they’re a new employee that has overpaid taxes in their last job and your accountant gives you the lovely surprise when the new employees P45 comes in. Or maybe they’re like our example below and have realised there are owed a few new tax credits and had their tax credit certificate amended accordingly!
The way you might recognise this is you get a lovely notification from Revenue stating that your employee has a new tax credit certificate. You’ll get this notification through the ROS system in the form of a new P2C.
A P2C is effectively the employer copy of an employee’s tax credits that will show tax credits, standard rate cut off bands, USC cut off points and also the amount of Local Property Tax to be deducted, if applicable.
We’ll use the example that your employee went from having tax credits of €1,650 (€31.73 per week) to €4,950 (€95.19 per week). We will also assume that they earn €500 gross per week. All other things being equal the initial weekly PAYE they would pay would be €68.27 (€500 x 20% - €31.73). With the new credits they are entitled to the PAYE they would pay would be €4.81 (€500 x 20% - €95.19). A big difference!
For the sake of our example, let’s say that the new P2C comes in around July time, in week 30. You of course, do not have access as to why your employees tax credits have changed, unless they’ve told you! At the rates stated in our example, you could infer that your employees spouse has transferred the married credit of €3,300 over to your employee. The spouse may have decided that they didn’t need all the tax credits or maybe they only work a few hours and would never use the tax credits. Regardless of the reasoning, it’s up to the employee to make sure that all their details and tax credits are correct and up to date with Revenue. It is the employer’s job to operate the payroll system in line with the credit certificate as issued by Revenue. At least that’s one less thing for you to worry about!
As you’re probably aware, tax credits are generally operated on a cumulative basis over the year, so in this example a refund or ‘catch up’ of 30 weeks is now owed to the employee. This works out as €1,903.80 PAYE overpaid by the employee in the year to date.
So here we have our question, who in the world pays the employee back the €1903.80?! You or Revenue?
To put it bluntly, in the first instance you as the employer has to refund this money to the employee. Don’t forget that as the employer you have already deducted this money from your employee over the previous 30 weeks and paid it over to revenue in the monthly P30 returns.
In essence, this means that the amount of money you pay back to employee reduces the amount owed on the next P30 when submitting this return. The amount of PAYE returned to the employee will be deducted from the PAYE owed amount. If this was to result in an actual refund of PAYE owing to the employer (because it became a negative number) you deduct the excess from the USC liability. Hopefully there is enough USC owing to cover the excess!
Near €2,000 is a lot of money for a small business to pay out in one go, especially if you only have a few employees. There is the very real danger of putting yourself into a short term cashflow situation (this is something you could’ve predicted but situations like this arise all the time, check out our post here on how to best to manage your cash flow). This could especially be the case if you are on quarterly P30 returns and the refund happens early the quarter. You may be waiting several months for the cashflow benefit of the reduced P30 to hit. If this is the case, you should speak to Revenue directly. A simple call to Revenue, explaining the situation may result in them helping with the timing of the payments.
Figuring out the ins and outs of Revenue jargon can be a tiresome business, which is why we’re here to help! Drop us a line at firstname.lastname@example.org or call us on 051 396703 to see how we can help you!