Backpay all taxed at top rate, but would have been taxed at standard rate. Revenue not budging.

argolis

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47
Hi,

My brother works for a county council and they realised in 2018 that he was on the wrong pay since 2014. He would have mild learning disabilities and wouldn't have realised any of this. They put him on the right pay and gave him a lump sum payment for the backpay he was owed. The Revenue then taxed that at the higher rate.

I contacted Revenue on his behalf about getting his backpay fairly taxed, because if he'd been paid correctly he'd only have paid the lower rate of tax on all of it. Revenue asked for a breakdown of how much he was underpaid each year which was given but they are now refusing to make any adjustment further back than 2017. So, for 2014, 2015 and 2016 his backpay is all taxed at the higher rate.

Their rules on the basis of assessment changed in 2018, with 2017 as a grace period, so that taxes are now due when pay is actually received. This was to prep for PMOD and there's a few basic exceptions being made with the new rules but nothing that covers backpay:


I roughly calculate this is worth about 5k to my brother. I really feel this is unfair to him that through no fault of his own he's getting shafted.

If anyone has an idea on how I could pursue this any further, I'd appreciate it cos I'm drawing a blank right now.

Cheers
 

Clamball

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I think you need to take it up with the employer. All revenue know is he was paid extra in 2019. The employer should ensure that they make good his loss.

So he was down 1k for example in 2014 on his take home pay, then his employer should ensure they pay him sufficiently this year so that his take home pay is up €1K. And do the same for the remaining years. He is also going to have a problem with his pay for all the rest of this year as it will be taxed at the higher rate.

And has he lost out on pension contributions which should have been a % of his pay.

Given that he has some mild disabilities he and an advocate should sit down with his company and get some figures on take home pay from them.

Given that he was underpaid in 2014 what was the difference between his actual take home pay and what his take home pay should have been if the employer had not made a mistake.

Do this for each year up to 2019 and then ask

So he is overall down €5K. What do you need to pay him next month to ensure his take home pay is up by 5K.

And how are you going to ensure that his take home pay for 2019 remains correct, given that he would not be taxed at the higher rate only for the fact of the mistake you made.

Don’t forget the pension, if any.

Just rectifying the back pay is not sufficient to restore him to where he should have been if the county council had not made a mistake.
 

DB74

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1,597
The fact that he has been paid this lump sum now could mean that even though it has been taxed at the top rate of tax now, by the end of the year it could all end up in the 20% band so are you sure that this is not the case

Doing the sums it appears that the lump sum is around the €25K mark, is this correct?
 

mathepac

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Can he not request P21 balancing statements for 2015-2018 after getting a statement from the LA about how much back-pay should have been paid in each year?

It seems very unfair that incompetence in area of the civil/public service should be compounded by indifference in another. It's not like they're under-paid. Did any of them miscalculate their own wages or tax liabilities?
 

Sophrosyne

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Revenue cannot help you in this matter. It is obliged to administer the legislation as written and so it must apply the FA 2017 changes in the basis of assessment.

However, I cannot see the purpose for the legislative change.

In FA 2017, it comes under the heading of PAYE Modernisation.

But since, formerly, the taxation of arrears of pay would have been rectified by end-of-year review for the years concerned, it would not have interfered with current year operations of PAYE.

Perhaps you might ask your local TD to discover the reason for the change and whether there is governmental awareness that consequent to that change, arrears of pay must be assessed in the year they are paid rather than the year they are earned, thus sometimes creating an inflated tax liability.

On the one hand, the change may be connected with an aspect of PAYE Modernisation, which has not yet been fully explained.

On the other hand, in creating and drafting legislation, there might be unforeseen unintended consequences, which could on investigation be overturned.
 
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argolis

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Apologies for the delayed responses, I didn't realise there were some response as the thread notifications were caught by my spam filter! :confused:

@Clamball Thanks for your response. I don't think any employer would entertain making a larger payout to make good on net pay problems. I think employers tend to think in terms of gross pay and if it's been paid, it's been paid. Up to you to sort out your tax affairs and good luck... just my opinion though!

@DB74 He's on €36k since 2018 (or thereabouts), so the lump sum added on top of his salary in 2018 was all taxed at the higher rate. You're close - the lump sum was about €28k but they added some adjustments for holiday pay and other things totalling it to €32k. They've sent him out cheques correcting 2017 and 2018 which is a good start.

He was on approx €27k salary up to 2018. If he was correctly paid €36k per year since mid-2014 then the extra €9k each year would almost all be taxed at 20%. However, because of the new rules, it's all taxed in 2018 at the higher rate. To me it seems like the backpay owed:

2014 - €4800
2015 - €8600
2016 - €8900
Total = €22,300

Taxed at 40% in 2018 = €8920
Taxed at 20% in each year = €4460

Those are quite rough calculations, but it seems to me he's being done out of €4460, for argument's sake.

@mathepac We did that, got a breakdown from his employer of what extra pay he should have had each year but Revenue won't assist any further back than 2017. You've put it incredibly well: "It seems very unfair that incompetence in area of the civil/public service should be compounded by indifference in another"

@Sophrosyne Thanks for your input. From what I saw, Revenue want to put an end to several end-of-year practices that make their life difficult under PMOD, things like sales bonuses being declared for 2018 but only paid out in 2019. How exactly it helps them, I don't know but that seems to be their emphasis from what I read.

We may end up contacting a local TD or councillor.

Thanks all :)
 

Sophrosyne

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We may end up contacting a local TD or councillor.
I was thinking more that your T.D. might table a parliamentary question. In that way the government would have to justify the change in the basis of assessment.

Arrears of pay would be a common enough occurrence and so lots of people might be impacted.
 

Leper

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846
For the sake of argument let's say your brother earned much less in his job the year the back money was paid and the lower rate of tax still prevailed after the payment of the back money due. Would you be arguing that he should have paid more tax? My gut answer:- Probably not.

Revenue would look on this as swings and roundabouts but your brother through no fault of his own is out of pocket. Asking Revenue to do a U-turn like this for one would open the floodgates on nearly every trade union monetary claim. More staff would be required in our Tax Offices for a start.

Your brother is in an unfortunate position and will pay the price for not noticing he was underpaid for years and his honesty is not being rewarded.
 

argolis

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@Sophrosyne Thanks, I will write to the local TD(s) and see what response I get.

@Leper That's a fair point, as no, we wouldn't be arguing he should pay more tax in that scenario. Being honest, if I'd known he was going to be treated this way by Revenue I'd have told him to take a career break in 2018! Not ideal in his situation but somewhat better.

However, I would say this isn't as big a U-turn for Revenue as you've described, because up until the rule change in 2018 this would all have been handled as I'd have originally expected i.e. on an "earnings basis" assessment rather than "receipts basis". Every trade union monetary claim up until then would also have been handled the same way. Whatever staff the Revenue have handling backpay and settlement claims up until last year, have presumably done so in that manner without issue. This is a simple barring by an arbitrary date, the procedures and processes are otherwise all the same.

Now that you say it, if there are union or other collective settlements over the next few years which relate to work prior to 2017, I wonder will it be raised in the media/with public representatives that they're also being unfairly taxed?

@torblednam Look forward to hearing about it...

Thanks again :)
 

Leper

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846
I think we're getting into debate about ifs and buts. In my last 30 years working in payroll and human resources departments (all public service) I've never seen anybody paid backmoney without it being taxed in the same tax year it had been paid. Furthermore, I cannot recall providing even one letter for anybody (employee or Revenue representative) indicating for which year(s) the back money was due.

A good point was raised earlier about taking a career break to allay tax payments. Working less hours or job-sharing in a particular year is another option. I have seen Public Service managers and staff reduce hours to ensure they were under earnings limits for 3rd Level Grants for their offspring.

After all had been achieved the hours increased again. "Wild Irish" how are ye?
 

torblednam

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397
I think we're getting into debate about ifs and buts. In my last 30 years working in payroll and human resources departments (all public service) I've never seen anybody paid backmoney without it being taxed in the same tax year it had been paid. Furthermore, I cannot recall providing even one letter for anybody (employee or Revenue representative) indicating for which year(s) the back money was due.
With respect leper, just because you never experienced it, doesn’t mean it never happened…

I have seen, and been involved in, several instances of it. One example is the former employees of Waterford Crystal, who received substantial back paid pension for several years, on foot of a High Court determination.

Payroll deductions were correctly made by the payer, at the time of making the payments, in accordance with the legislation and regulations governing PAYE.

However, the individuals also received confirmation of the period to which the back pay of pension related, and on application to revenue, they are able to have balancing statements issued to increase the income in earlier years and decrease the income in the year of receipt of the lump sum.

The effect of which is a big refund in respect of the tax and other deductions at high marginal rates in the year of payment, which was able to be set off against increased liabilities ( often at the standard rate or partially covered by tax credit) in the earlier years to which the income referred.
 
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Sophrosyne

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988
Revenue would look on this as swings and roundabouts but your brother through no fault of his own is out of pocket. Asking Revenue to do a U-turn like this for one would open the floodgates on nearly every trade union monetary claim. More staff would be required in our Tax Offices for a start.
Lep,

This is not a case of Revenue arbitrarily changing its practice or being obstructive but rather that section 112 was amended by FA 2017.

That amendment changed the basis of assessment of emoluments to the year they were paid rather than the year they were earned. Revenue cannot act in contravention of the legislation and so pursuing the matter with Revenue would be pointless.

Prior to that amendment, the reverse applied, i.e., income was assessable in the year it was earned regardless of when it was paid.

This was reinforced by case law, most notably the cases of McKeown v Roe, Dracup v Radcliffe and Heasman v Jordan.

There was good reason for this. People are obliged to pay only the amount of tax that is correctly due and payable.

The main issue here is that the FA 2017 amendment has the capacity to artificially inflate the tax due in the case of arrears of pay. The inflated tax amount might be considerable where the arrears are substantial.

I don't think this is generally realized.

This might or might not have been the intention of the amendment.

If it were unintentional, the amendment might be modified.

I think a PQ might be the better route in order to obtain clarity and it would cost the OP nothing.
 

Leper

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846
I hope you are right Sophrosyne and I hope Argolis gets a tax refund for his/her brother (he deserves it). I wish to acknowledge Torblendam's post too.

Parliamentary Questions are expensive. Civil servants must review the situation, get reports from the employer, liaise with the political representative and Revenue Commissioners, prepare the wording of the PQ and later prepare the answer to the PQ. This is a cost to the tax payer. Guess what! - The answer to the PQ must be on the desk of the person asking the PQ two weeks before the question is asked (if this isn't crazy, what is?). In my days in the Public Service I prepared several Parliamentary Questions and Answers. They are a godsend/windfall as almost guaranteed overtime for public servants.

I cannot understand why the Revenue Commissioners cannot give an immediate favourable resolution on such a relatively simple matter. Then there is the appeal process with Revenue which can take two years (and probably more).

Incidental Point:- If Argolis' brother underpaid his tax Revenue would charge him unhandsome interest in a subsequent audit. How is it that the brother is not entitled to interest in the amount overpaid?
 

Horatio

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"We may end up contacting a local TD or councillor.


I think I'd go for a tax advisor first in the interest of getting it closed off rapidly. Hope it works out.
 

Shirazman

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Whatever about contacting a local TD, contacting a Councillor is a waste of time, imho.

Argolis, have you considered approaching the council and asking them to phase the still due arrears over the next couple of years? This, allied to him taking a strategic career break spanning a couple of tax years might help to reduce the higher tax liability.
 

WolfeTone

Registered User
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227
Have you considered Equal Status Act, 2000 section 4?

"discrimination includes a refusal or failure by the provider of a service to do all that is reasonable to accommodate the needs of a person with a disability by providing special treatment..., if without such special treatment...it would be...unduly difficult for the person to avail himself of the service"

From what you have stated I would consider that your brother may have a case against Revenue on the basis that they are not being reasonable to accommodate his needs on account of his inability to, or it being unduly difficult for him, to avail of services with Revenue regarding taxation matters of this kind.
 

Olliej

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Not meaning to hijack thread but I am due holiday pay from changing employer last year but have not yet received it, have you any advise in advance can I submit a request to revenue to be taxed for the period I should have received this being 2018 ?
 

Gordon Gekko

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Is it not the case that if my employer pays me the wrong amount and it ends up being taxed to a greater extent, my employer has to pay me more to get me back into the original position?

It’s not a Revenue issue, it’s an employer issue.
 
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