Newmarket News February 2009

Newmarket CURVE Programme for Recovery

As part of our ongoing briefings on our CURVE programme we set out below some tax tips which may help ease some of the restructuring that is being contemplated.

We at Newmarket are also committed to helping clients protect their hard earned assets.  More on this another day.

In the current economic controlling costs will be a key objective of most businesses. Inevitably focus will fall on employee costs.  Already we have seen employers looking to implement salary reductions and unfortunately in some cases redundancies will be inevitable. Fortunately tax law offers some help in implementing such painful decisions. Here are some tips!

Redundancy Payments

Statutory redundancy payments are fully exempt from income tax and PRSI.

The tax legislation also allows for additional redundancy payments above the statutory amount to be tax-exempt up to a certain limit. This limit is based on the employee’s level of service, salary level and pension entitlements. For instance an employee with 5 years’ service would be entitled to an additional payment of at least €13,985 (and possibly more!) above the statutory amount.

Salary Restructuring

It may have been regarded as a relic of tougher times but the ‘Relief for agreed pay restructuring’ is still in place!

Essentially this allows an employer to make a lump sum payment to his employee in returning for the employee agreeing to a reduction in salary.

In order to get this relief the employer must receive certification from the Department of Enterprise, Trade & Employment that it has agreed a restructuring of operations with its staff in response to a ‘substantial adverse change in its competitive environment’. In the current environment we may see this become a more regular occurrence.

The restructuring must include a salary reduction of at least 10% for at least half of the workforce and this reduction must be designed to last at least five years.

If all the conditions are met the employer could pay each employee effected a tax-free lumpsum ranging from €7,620 to €25,460 depending on the employee’s service levels and severity of the salary reduction involved.

Ongoing Staff Costs
Of course employers should never lose sight of some of the more routine opportunities offered by tax law, such as:

• The entitlement to give staff one voucher up to the value of €250 per annum tax-free
• Monthly or annual commuter tickets are exempt from BIK
• As of this year you can even give your staff a free bike without having to worry about the tax consequences!

Retirement of some executives
We have also recently seen restructuring or family succession accelerated in the current climate.  The reliefs for a person looking to retire or dispose of an interest in a business are substantial.  Greater reliefs are available when this takes place within a family.  In the current climate we would consider that these arrangements will come under far greater scrutiny and may be modified in future budgets.  Also with business and asset valuations much lower there maybe an opportunity to undertake such a move much more tax efficiently than in the past.  On occasion we have found that the tax cost has been one of the barriers holding up such a transfer.

We find that these arrangements take time to put in place particularly if assets need refinancing or shareholdings need restructuring.  Valuations of such properties and businesses are also a matter of keen judgement.

If this is part of your plans we advise that you begin planning now

Income Levy
Lastly there is a sting in the tail of the recent income levy.  The position is that income below €352 per week and €18,304 per annum is not subject to the levy.  The problem arises when  this person goes over the threshold due to overtime or bonus they could end up paying levy on all income.

For example an individual who earns €18,304 is awarded a bonus of €500. He will pay the income levy not only on the €500 bonus but on his full salary of €18,804 as he has now exceeded the exempt threshold. The cost of the income levy to this individual will therefore be €188. This is in addition to income tax and PRSI of 24% on the bonus itself meaning that a total of €308 – or 68%!!!-  of this bonus will go to the taxman.