A number of Revenue Guidance Documents have been introduced following Finance Act 2014 being signed into law on 23rd December 2014.
3. Guidance on Compensation Payments under Section 2B of Employment Permits Act 2003 – eBrief no. 112/14 (24th December 2014)
The best starting point in relation to understanding the tax treatment of awards/settlements is Section 192(A) Taxes Consolidation Act 1997. It can be summarised as follows:
• If the award/settlement relates to a loss of wages/salary such as a Payment of Wages Claim or an Unfair Dismissal Claim then it is liable to tax. In other words, if the award/claim relates to financial loss then it’s taxable.
• If the award/settlement relates to compensation for a breach of the employee’s statutory entitlements (i.e. which are not deemed to be remuneration or arrears of wages) then the payment is not taxable. In other words, it’s exempt from tax if it relates to an infringement of the employee’s rights.
Now that we’ve established that the main distinction between a taxable award/settlement and a tax exempt award/settlement is the distinction between wages/salary and compensation, let’s look at Section 2B of the Employment Permits Act 2003. This piece of legislation was introduced to prevent or at least deter employers from employing foreign nationals without a valid employment permit.
How does it work?
It allows the foreign national to take a civil action against his/her employer for compensation in relation to work done or services carried out even if there is no legal contract in place.
As the compensation is not deemed to be for an infringement of a right, rather, it’s considered to be the reimbursement of a salary or wages then it is liable to tax.
The compensation is calculated by a court order based on a national minimum hourly rate of pay (or any rate of payment which is fixed under, or pursuant to, any enactment).
What is the tax treatment?
The tax treatment of these compensation payments is covered by two new provisions:
1. Section 124A Taxes Consolidation Act 1997 and
2. Section 5A of Section 192(A) TCA 1997
which were introduced by Section 37 of the Employment Permits (Amendment) Act 2014.
If compensation payments are made to individuals under Section 2B of the Employment Permits Act 2003 they are liable in full to PAYE and the Universal Social Charge.
They will not be liable to PRSI as they are not treated as “reckonable emoluments” as defined in the Social Welfare & Pensions Act 2012.
Next: Part IV – 4. Guide to the Capital Acquisitions Tax Treatment of receipts by children from their parents for their support, maintenance or education – eBrief no. 109/14 (24th December 2014).