Seanad debates

Monday, 14 June 2021

Nithe i dtosach suíonna - Commencement Matters

Tax Collection

10:30 am

Photo of Barry WardBarry Ward (Fine Gael)
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I raise the issue of professional withholding tax, which is a matter many will not know about because the only people affected are those who collect it and those who pay it. It affects many thousands of workers in this country who provide professional services to the State through local authorities, the HSE, Departments or whatever it might be. They include engineers, medical staff, lawyers and anybody providing professional services to the State. In those circumstances, 20% is deducted from their earnings at the end of the year to cover their tax liability because these people are self-assessed taxpayers.

Most people are pay as you earn, PAYE, workers and their income tax is deducted at source, which is very convenient, but for self-assessed, and very often self-employed, taxpayers the State takes a 20% chunk at source. This taxpayer only gets paid €800 on a fee of €1,000. That might sound harsh but can in fact be a major advantage to the individual because it means that person has a 20% tax credit at the end of the year. It is of significant benefit to the State's cash flow because it means the money is available to it from the word go, as opposed to waiting a year until a tax return is filed and paid, etc.

I raise the issue today to suggest it might be worth the Department's time to consider allowing those people who fall into the professional services withholding tax bracket, to opt to pay at the 40% rather than 20% rate. Any of them likely to fall into that marginal rate may choose to pay the tax at 40%. To be absolutely clear, I am not suggesting that would be a tax increase on any of them. I am suggesting the professional services withholding tax would be collected in a different way. Rather than taking a 20% chunk at source, we would take 40%. The idea is the person has a 40% rather than 20% tax credit at the end of year.

Why is that useful for individuals? In the first instance, if it is not I suggest they do not opt for it. The idea is this would be available to them so they can choose to go down this road if they want. Second, as a self-employed person who has been in this situation, it is tremendously helpful, at the end of the year when so many bills are due and there are many other things that need to be paid, to be able to say that the bulk, or all, of my tax is already paid. It means not having to worry about that extra bill at the end of the year.

From the State's perspective, there is clearly an advantage. From a cash-flow and certainty of receipts position, the State knows exactly how much it has taken from those people providing professional services. It has that 40% in the bank, as it were, without creating cash-flow difficulties for the Exchequer. Obviously, if the person who opted to pay 40% does not make it into the top rate of tax then he or she is entitled to a rebate. However, there is still an advantage, both to the taxpayer who is better able to manage his or her tax affairs as the end of the year approaches, and to the State, which resolves a potential cash-flow issue. We constantly monitor Exchequer returns throughout the year to see what level they are coming in at. This creates a much greater level of certainty for the Exchequer regarding people who fall into this category.

I ask the Minister of State if the Department will consider creating this option for mostly self-employed, professional service providers to the State when they are paying tax at source. Much like PAYE workers, they will be able to opt to pay it at the higher rate to reduce the liability that might fall on them at the end of the year. This will help their cash-flow management and will also provide for greater cash-flow management for the Exchequer.

Photo of Seán FlemingSeán Fleming (Laois-Offaly, Fianna Fail)
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I thank the Senator for raising this issue. When I saw this particular Commencement matter, I felt it was extraordinary that someone would want to opt to pay tax at 40%, but I knew straightaway what was behind it.Professional services withholding tax, PSWT, is a deduction at the standard rate of income tax at 20% from relevant payments made by accountable persons to specified persons. They are the service providers in respect of certain professional services. The tax deducted is a payment on account. I stress that. It is not, and was never intended to be, a payment to cover the tax liability for the year. It was always only a payment on account. That is the key point I want to make. It is against a person's specified final liability for the year with the amount of PSWT deducted credit against the tax liability for the full year. "Specified person" can include businesses undertaken via a company, sole trade or a partnership.

"Accountable persons" include Government Departments, State agencies and bodies, local authorities, colleges and authorised medical insurance providers. The definition of "professional services" covers a wide range of services such as medical, architectural, engineering, financial, legal and geological services. Upon making a relevant payment, an accountable person will issue a certificate, known as an F45 form, to the specified person showing details of the payment and the tax deducted. The legislation provides that a specified person may, in certain circumstances, make a claim for a refund of PSWT in the year in which it is deducted, referred to as an interim refund. Among the requirements for the making of an interim refund claim is the requirement that the specified person's profits for the previous period have been finalised and that the tax due for that period has been paid. All claims must be accompanied by the relevant F45s. Any refund due will be processed and made by Revenue. That is the people at the other end of the scale, who are looking for a refund. They might feel the 20% was excessive in their particular case when the costs of running their particular service are taken into account. It is proposed to introduce electronic professional services withholding tax, EPSWT, from 1 July 2021, which is in the next fortnight or so. Section 13 of the Finance Act 2020 provides for an electronic payment notification via Revenue Online Service, ROS, and the ending of the paper P45 form. I am sorry, I meant F45 form. I should not have mentioned the P45 in this context.

As an accountable person applies a deduction to a relevant payment it is not possible for a specified person to choose the tax rate which is applied to this relevant payment. As the query relates to PSWT being withheld at 40% as opposed to 20%, I will focus my following comments on self-employed individuals, because it is all about the persons concerned. For the income tax year 2021, an individual is subject to tax at 20% on income up to €35,300 and 40% thereafter. An individual will also qualify for a personal tax credit and an earned income tax credit totalling €3,300. The result of this is a lower effective income tax rate than 40% on an individual's income. It is also important to note that an individual is subject to PSWT on his or her gross income, that is, before any deductions incurred wholly and exclusively in the trade such as insurance, rent, salaries, etc. A self-assessed individual must pay preliminary tax for the year equal to, or more than, the lowest amount of the following: 90% of the tax due for that tax year; 100% of the tax due for the immediately previous tax year; or 105% of the tax due for the tax year preceding the immediately previous tax year. This option only applies where a person pays by direct debit.

An individual can choose to pay additional preliminary tax throughout the year should he or she believe his or her current year tax liability will be higher than the previous tax year. Revenue has advised that there are a number of options available to self-employed individuals to make payments on account in respect of their income tax liability throughout the year on the Revenue Online Service using a ROS debit instruction, or via MyAccount using a debit instruction. These systems will accept bank account details or debit or credit cards. A third option exists where an individual can apply for a direct debit instruction. There is, therefore, an option for persons to pay the additional tax as the year goes on, depending on how they expect their own situation to evolve.

Photo of Barry WardBarry Ward (Fine Gael)
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I thank the Minister of State for his response. I welcome the electronic element of this that is coming. It is absolutely welcome and Revenue is generally very good at putting these things online. I am delighted to hear the Minister of State saying this is all about the individual because that is exactly where I am coming from. The question I am asking is whether this is something Revenue will do or will consider doing. Of course we can make voluntary tax payments during the year but that does not reflect the reality of how people work with respect to their tax affairs.

The Minister of State has mentioned this is a payment. My proposal would be an option for individual taxpayers. It would allow them to choose to pay at the 40% initially, on account, as it were, and to have that money banked with respect to their liability at the end of the year. I recognise it is not to pay their liability but it helps to pay their liability and gives them a huge advantage when it comes to the end of the year. I am wondering if the Government will give people the option to do that, to recognise the reality of tax flow problems, particularly for self-employed professional services providers.

Photo of Seán FlemingSeán Fleming (Laois-Offaly, Fianna Fail)
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The idea of having an option of which withholding tax to pay is not part of the system. The 20% withholding tax applies to vast areas, including ones people will have seen much discussion of, such as some investment funds. There was an exception made there and it was brought up to 25% for some particular categories but right across the board there is a 20% withholding tax rate and Revenue has said that by and large - I do not have the statistics to hand - that covers the liability for most people. There are many people who, when all the expenses of their businesses are taken into account, fall into the category where their maximum top tax rate is 20%. I understand some people will certainly be paying at 40% but I am told the vast majority of those receiving this would not be in that category when the expenses of the business are taken into account. I will say that should an individual believe his or her current tax liability will be higher than it was the previous year, he or she can choose to pay additional preliminary tax through the year. I know the Senator said that is not the normal way but many people run their lives by ordering only so much heating oil per month and pay it that way rather than a bill every time the lorry comes to fill the oil tank. People pay their electricity bill and many people pay their bills on a monthly basis, and there is provision there for circumstances where a person feels he or she has a requirement to do so. However, I am not in a position to say there can be that option for the 40%.