Mazars - Tax update on the Temporary Wage Subsidy Scheme

1. ADDITIONAL (TOP-UP) PAYMENT BY AN EMPLOYER AND THE IMPACT ON THE SUBSIDY

Revenue has clarified the situation where employers make an additional (top-up) payment to employees.

An employer can choose to make an additional payment to the employee to fully or partially make up the difference between the amount provided by the subsidy scheme and the employee’s Average Net Weekly Pay.

Revenue has confirmed that such additional payments cannot be re-grossed and are regarded as gross pay and liable to income tax and USC.

If the employer makes an additional payment greater than the difference allowed by the scheme (i.e. the employee receives more than the Average Net Weekly Pay), then the subsidy value refundable to the employer will be reduced by this excess amount when the refund reconciliation is performed by Revenue in due course.

Example

An employee is paid weekly and has an Average Net Weekly Pay of €550 (A).

As the employee’s Average Net Weekly Pay is less than €586, the maximum weekly wage subsidy allowable for this employee is €385 (B), which is 70% of their Average Net Weekly Pay.

The maximum additional payment an employer can make, to receive the full subsidy, is €165 (C), being the difference between the employees Average Net Weekly Pay €550 (A) and their maximum weekly wage subsidy €385(B).

In this example, the employer can make an additional payment up to the value of €165 (C) and receive the full subsidy (see (i) below) for this employee: however, if the employer’s additional payment exceeds this value then the subsidy must be reduced by the value of the excess (see (ii) below).

This reduction may not be applied automatically by the payroll software package that employers are using.

Where applicable, Revenue will apply a subsidy reduction when calculating the subsidy refund that the employer will receive. In the transitional phase (see Q.2 below), this will be reflected in the balance payment due to be refunded to Revenue in the future (G).

i) Employer chooses to make an additional payment to receive the full subsidy

If the employer makes an additional payment of €165, the employer reports €165 as Gross Pay (D) and income tax and USC will be deducted by reference to the most recent Revenue Payroll Notification (RPN).

The employer enters the subsidy of €385 (E) in the payroll as non-taxable pay.

• The employer will be eligible for the refund of €385 (E).
• During the transition phase, the employer receives a refund of €410 (F) and, at a later phase, the reconciliation will recoup the €25 (G) difference between €410 and €385.
• During the operational phase, the employer will receive a refund of €385 (E).

ii) Employer chooses to make an additional payment greater than the amount allowed to receive the full subsidy.

If the employer makes an additional payment of €200, the employer reports €200 as Gross Pay (D) and income tax and USC will be deducted by reference to the most recent RPN.

As the €200 additional payment exceeds the maximum additional payment the employer can make to receive the full subsidy by €35 (€200 (D) – €165(C) ), the subsidy is reduced by €35 to €350 (E) and the employer enters the reduced subsidy value of €350 (E) in the payroll as non-taxable pay.

• The employer will be eligible for the refund of €350 (E).
• During the transition phase employer receives a refund of €410 (F) and, at a later phase, the reconciliation will recoup the €60 (G) difference between €410 (F) and €350 (E).
• During the operational phase the employer will receive a refund of €350 (E).

Summary table

Revenue has published a useful summary table (reproduced below) which illustrates the reduction on subsidy (E), and change to PRSI class, as the employer’s additional payments (D) increase.

Notes:

• As the value of the additional payments (D) increase to reach (green area) the value of the Maximum additional payment the employer can make to receive full subsidy (C) the total payments received by the employee (D + E) also increase.

• Once the value of the additional payments (D) increase beyond (yellow area) the value of the Maximum additional payment the employer can make to receive full subsidy (C) the total payments received by the employee (D + E) stays constant as any increase in additional payments (D) will have a matching decrease in subsidy (E). However, as these additional payments are subject to tax and USC, the employee’s Net Pay will decrease as the taxable Additional Payments increase.

• Once the value of the additional payments (D) increase beyond (blue area) the value of the Employee's Average Net Weekly Pay (A) the subsidy (E) will be eliminated and the employee will no longer be eligible for any subsidy and the employee’s PRSI class will return to the normal PRSI class for that employee.

2. WHAT ARE THE TWO PHASES TO THE TEMPORARY WAGE SUBSIDY SCHEME?

Phase 1 is a short, transitional phase that builds on the previous emergency Employer COVID Refund Scheme that was operational from 15 March to 25 March 2020, under which the employer received a refund of €203 per week for each employee that it keeps on its books. The Temporary Wage Subsidy Scheme provides a maximum of €410 in respect of eligible employees for employers who operate the Subsidy Scheme regardless of whether the employer makes an additional payment to the employee’s earnings or not.

During the short transition period, the Subsidy Scheme:

• Increases the maximum refundable payment to €410 or 70% of the employee’s Average Net Weekly Pay, whichever is lesser, for employees earning less than or equal to €586 per week net.

• Increases the maximum refundable payment to €350 or 70% of the employee’s Average Net Weekly Pay, whichever is lesser, for those earning over €586 per week net and less than or equal to €960 per week net.

• Allows employers to make additional payments to its employees. These additional payments are subject to tax and USC in the normal way.

In Phase 2, by no later than 20 April 2020, the operation of the scheme will ensure that the Subsidy paid to employers will be based on each individual employee’s Average Net Weekly Pay, subject to the maximum weekly tax-free amounts. Revenue has stated that further information on how these arrangements will work will issue shortly.

3. IS THE WAGE SUBSIDY TAXABLE ON THE EMPLOYEE?

Revenue has stated that the payments are liable to income tax and USC; however, the subsidy is not taxable in real-time through the PAYE system during the period of the subsidy scheme. Instead the employee will be liable for tax on the subsidy amount paid to them by their employer by way of review at the end of the year.

When an end of the year review takes place, it may be the case that an employee’s unused tax credits will cover any further liability that may arise. Where this is not the case, and should a tax liability arise, it is normal Revenue practice to collect any tax owing in manageable amounts by reducing an individual’s tax credits for a future year(s) to minimise any hardship. Additionally, if an individual has any additional tax credits to claim, for example health expenses, this will also reduce any tax that may be owing.

4. IS THE ADDITIONAL PAYMENT (TOP-UP) TAXABLE?

Yes, such additional payments, which cannot be re-grossed, are regarded as gross pay and liable to income tax and USC withholding.

The employers PRSI is reduced from 11.05% to 0.5% and no employee PRSI applies. Qualifying employees should be coded as PRSI Class J9 for the purposes only of its reporting obligations. Entitlements will not be regarded as broken, and employees will get insurable weeks or credited contributions. This matter will be fully examined by DEASP and agreed.

Revenue has stated that in some cases the payment of the Temporary Wage Subsidy and any additional income paid by the employer will result in the refund of income tax or USC already paid by the employee. Any income tax and USC refunds that arise as a result of the application of tax credits and rate bands can be repaid by the employer and Revenue will also refund this amount to the employer.

5. WILL EMPLOYERS BE ENTITLED TO THE FULL SUBSIDY AMOUNT UNDER THE TRANSITIONAL ARRANGEMENTS?

During the transitional phase (phase 1), employers will receive €410 subsidy per week for each employee that they have made a PRSI Class J9 submission for, regardless of the amount of the subsidy actually payable to the employee. In many cases this amount will exceed the subsidy that the employee is entitled to receive for that week and in these cases, the employer is obliged to retain the excess of the subsidy payment received over the amount of the subsidy actually due to each employee. In other words, Revenue is placing the onus on the employer to calculate the subsidy payment that each employee is entitled to, and if this amount is lower than the €410 received from Revenue, then the employer must retain the excess, and not pay it to the employee, as the excess is refundable to Revenue by the employer (not the employee) in the future. 

In the operational phase (phase 2) of the scheme, this excess amount will be taken into account by Revenue when paying future subsidy payments to the employer or will be repaid directly to Revenue.

6. ARE THE SUBSIDY AND TOP-UP PAYMENTS DEDUCTIBLE AGAINST INCOME TAX OR CORPORATION TAX?

In computing the employer’s liability to income tax or corporation tax, as the case may be, the employer shall not be entitled to a deduction in respect of the temporary wage subsidy payment paid to an eligible employee under the scheme.  However, as regards the top-up amount, it appears that the top-up payment is fully taxable deductible.

7. WHAT IS THE TAX TREATMENT OF THE COVID‐19 PANDEMIC UNEMPLOYMENT PAYMENT (PUP) OF €350? 

The Irish Tax Institute raised this question with Revenue a couple of weeks ago. On 3^rd April, Revenue responded by saying that the PUP “is paid by the Department of Employment Affairs and Social Protection (DEASP) to employees who have been laid off as a result of the pandemic. The tax treatment applicable to this payment has not yet been finalised. Revenue expect that such determinations will be made shortly and we will update our guidance and information accordingly as soon as possible thereafter.”