COMPLIANCE
Global
payroll
Tax time
Tim Kelsey FCIPP AIPA , managing director, Kelsey’s payroll services, provides a fascinating overview of how taxes and payroll withholding schemes are operated across the globe, and how they compare to what we’re accustomed to in the UK
T he introduction of pay as you earn (PAYE) during World War 2 in 1944 was a watershed moment for the UK. Not only did it change the role of the payroll department overnight, but it also heralded a major change for taxpayers. Readers might want to check out this old Pathe newsclip released at the time: http://ow.ly/Y19E50L9VjG. Previously, income tax had been paid on a twice-yearly cycle, linked to the submission of an annual tax return. The war had seen the number of taxpayers increase from ten million to 15 million in just four years, with anyone now earning over £150 per year (average wages were the equivalent of £4.50 per week) likely to be liable for tax. The new PAYE system was thus designed to ensure that these people of relatively modest means wouldn’t be troubled by the need to complete a tax return. This remains the blessing of the UK’s PAYE scheme. Our method of calculating tax by cumulative calculation, considering all income for the tax year to date ensures most of the working population still don’t have to complete a tax return. With a current working population of around 33 million people, only ten million self- assessment tax returns are required, and a significant proportion of these will be for non-employees. Our politicians astutely realised during the war that no one would thank them electorally if a
large proportion of the population had to commit time to completing a tax return. This brings us to one of the downsides to PAYE as well – an equally large portion of the population often seems to labour under the misapprehension that tax is nothing to do with them anymore, and that their employer takes care of everything for them. Ireland tax was exported to other countries, examples including Jamaica, Trinidad and Uganda. The Republic of Ireland also copied the UK’s broad PAYE scheme, when tax withholding was first introduced in 1967, to the extent that even the form numbers (the P45 for example) were copied. This made the Irish PAYE scheme relatively easy to learn for a UK payroll professional. However, a major change occurred in 2002, in tandem with Ireland formally adopting the euro and changing the fiscal year from a start of 6 April to 1 January. The system remained a cumulative one, assessing tax based on income earned for the year to date. But, instead of the award of tax allowances (which reduce gross income before tax is calculated), tax credits (which reduce the initial calculation of tax by the value of This method of calculating employment income
the credit) were awarded. Both methods achieve the same goal – they reduce the taxpayer’s overall bill. And the cumulative calculation means that Ireland has a similar minority proportion of taxpayers required to complete annual tax returns. Belgium But this method of calculating employment income tax is decidedly in the minority on the world stage. While British and Irish politicians seek to keep as many voters as possible away from the requirement to complete a tax return, other countries view matters quite differently and require all (or almost all) taxpayers to submit a return at the end of each tax year. The tax return then becomes the final arbiter of the numbers, and for this reason, PAYE schemes in such countries tend to be an aspiration to get close to the final liability, without necessarily hitting the target deduction to the penny. We would consider these calculations to be performed on a month 1 basis. Consider the Belgian professional withholding tax (PWT) enacted by employers. Belgium is a high tax jurisdiction (with a rate of 45% applying to taxable income more than €23,900!) but including a complicated series of allowances and reliefs designed to bring the average taxpayers’ bill down
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| Professional in Payroll, Pensions and Reward |
Issue 85 | November 2022
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