Changes to the Temporary Wage Subsidy Scheme explained – IFAC

By Declan McAvoy, Head of Tax with Ifac, the farming, food and agribusiness professional services firm.

“Operational changes to the Government’s Temporary Wage Subsidy Scheme (TWSS) were announced by Minister Paschal Donohoe on April 12, and these will come in to effect for payroll submissions to Revenue on or after May 4.”

Background:

Introduced in March and operated by Revenue, the purpose of the TWSS is to encourage employers to keep employees on the payroll throughout the COVID-19 pandemic, retaining links for when business picks up after the crisis.

When initially introduced, the TWSS was criticised for an anomaly whereby some employees on low pay were better off leaving payroll to avail of the COVID-19 Pandemic Unemployment Payment, a separate measure introduced to support individuals who have been laid off or lost their income due to the pandemic.

This anomaly was addressed in the Minister’s recently announced TWSS update.

What is changing?

Briefly, the changes announced by Minister Donohoe on April 15 are:

* An increased subsidy (from 70 per cent to 85 per cent) for employees with a previous average net weekly pay of up to €412,

* An extension of the TWSS to some previously excluded high earners,

* A reduction in the subsidy for employees earning more than €586 per week where their employer pays 60 per cent or more of their average net weekly pay. This is calculated using a tiered approach.

There are no changes in the subsidy rates for employees whose previous average net pay was between €500 and €586 per week. These employees will continue to receive a subsidy of up to 70 per cent of previous net income, up to a maximum of €410 per week.

Interim arrangements:

Up to May 4 the TWSS will refund employers €410 for each qualifying employee.

Previously, employees whose average net weekly pay exceeded €960 did not qualify for the TWSS scheme. However, from April 16 onwards, where an employee’s pre- COVID average net weekly pay was greater than €960, and their post- COVID net weekly pay has fallen below €960, the TWSS will be available for these individuals.

Updated TWSS rates from May 4:

From May 4, the TWSS will move to a system based on the employee’s average net weekly pay.

This is calculated as average net weekly pay in January and February 2020 as per the employer’s payroll submissions to Revenue. The updated TWSS rates are summarised below. No backdating will apply.

* An 85-per-cent subsidy (previously 70 per cent) will be payable for employees whose previous average net weekly pay did not exceed €412

* A flat rate subsidy of €350 will be payable for employees whose previous average net weekly pay was more than €412 but no more than €500

* A 70-per-cent subsidy will be payable for employees whose previous average net weekly pay was more than €500 but no more than €586, subject to a maximum subsidy cap of €410.

* A maximum subsidy of €350 will be payable to employees whose previous average net weekly pay was in excess of €586 but no more than €960. The subsidy will be calculated based on the number of additional payments made by the employer if any.

Table – Subsidy for employees earning more than €586 per week

Gross amount paid by employer:

Up to 60% of employee’s previous average net weekly pay:

Between 60% and 80%

Subsidy:

Up €350 p/w.

Over 80% of employee’s previous average net weekly pay:

No subsidy.

Ensuring employees are not better off under the TWSS scheme:

The Minister’s update states that tapering of the subsidy will apply in all instances where the gross pay paid by the employer plus the subsidy amount exceeds the employee’s previous net weekly pay. This is to ensure that no employee would be better off under the scheme. The only exception where tapering will not apply is where an employer pays an additional payment which when added to the subsidy does not exceed €350.

Qualifying criteria for employers:

There are no changes to the previously announced qualifying conditions for employers. Briefly, these are that employers must be significantly adversely impacted by the COVID-19 crisis with at least a 25-per-cent decline in turnover. Employers must be unable to pay normal wages and normal outgoings fully and must retain their employees on the payroll.

As with all self-assessment processes, it is vital that employers keep supporting documentation on file, as this may be required by Revenue at a later date.

Potential opportunity to avoid tax trap – ‘ Week One Basis’:

At the time of writing, more than 255,000 employees have received at least one payment under the COVID-19 Temporary Wage Subsidy Scheme.

Like any income, this payment is taxable. However, Income Tax and the Universal Social Charge are not deducted in real-time.

Instead, the subsidy payment will be liable to Income Tax and USC on review at the end of the year. Consequently, some employees are worried they may face a year-end tax bill, particularly if they are receiving ‘ top-up’ payments from their employer.

Income Tax – ‘ Week One Basis’:

Where appropriate, the ‘ Week One Basis’ for Income Tax could help alleviate employees’ concerns.

Also known as the ‘non-cumulative basis’, the ‘ Week One Basis’ calculates an employee’s Income Tax and USC week-to-week.

The employer treats each payroll submission as a standalone event, and the employee receives the tax credits for that particular period only.

This contrasts with the usual system where PAYE and USC are calculated on a cumulative basis from 1 January each year to the date on which the payment is being made. Unused tax credits can be carried forward to the next period.

Advantages and disadvantages of the ‘ Week One Basis’:

For employees in receipt of the Temporary Wage Subsidy payment, an advantage of the ‘Week One Basis’ is that it minimises the risk of receiving an Income Tax bill at the end of the year.

Typical reasons why an employee might be taxed on the ‘Week One Basis’, include:

* Where a large reduction in tax credits would result in hardship

* Where there is a lack of information from

the employees’ previous employment.

* In Week 53 of the year.

* When making payments to a ceased employee.

* When all of the employee’s tax credits and band allowances have been transferred to their spouse.

* Where an employee does not want their employer to have information in relation to their prior employment.

The main disadvantage of the ‘Week One Basis’ is that it can lead to overpayment of tax.

Furthermore, the employer cannot issue any refund of tax that may be due as this can only be done on a cumulative basis.

However, in the current circumstances where some employees fear a year-end tax bill due to their employer’s participation in the Temporary Work Subsidy Scheme, the Week One Basis may be an option to consider.