Irish Tax Institute warns new enhanced reporting requirements are too onerous for SMEs

The Irish Tax Institute has warned that Revenue’s new system of Enhanced Reporting Requirements (ERR) places a very significant administrative burden on businesses, particularly SMEs.

The new system, introduced on 1 January, requires employers to report details of certain benefits and payments made to staff in real time which means on or before they are given to employees.

One of the benefits impacted are gifts given to staff under the Small Benefit Exemption which allows employers to award up to two small tax-free benefits in a year.

This exemption is used extensively by business owners as a means of rewarding staff, typically with a voucher and in 2022, the maximum value of the exemption was increased from €500 to a €1,000. However, the legislation stipulates that only the first two benefits in any year can qualify for the exemption.

This means that any additional benefit the employer may grant later in the year is subject to income tax even if the cumulative value of all benefits paid is less than €1,000.

In its pre-Budget submission, launched today, the Institute said that the interaction of ERR with the restrictive terms of the Small Benefit Exemption has put employers who want to build a positive work environment by rewarding staff in an invidious position as illustrated by the case study below.

An employer gives all its employees a voucher for €200 in March and another €300 voucher at Christmas to reward them for their hard work. The employer sends a €50 bouquet of flowers to one employee, Jane, on her marriage in July.

As Jane has received a voucher for €200 in March and flowers in July, this means that the €300 voucher received at Christmas does not qualify for the Small Benefit Exemption as she has already received two benefits. The Small Benefit Exemption does not apply to the €300 voucher even though the cumulative value of the benefits which Jane received from her employer during the year has not exceeded the €1,000 limit.

As a consequence of the employer sending the flowers to Jane in July, the €300 voucher which she receives at Christmas is subject to income tax, USC and PRSI. It is not possible for the employer to opt to tax the flowers so that the €300 voucher qualifies for the Small Benefit Exemption.


Speaking today, Tom Reynolds, President of the Irish Tax Institute said: “As our example shows, this outcome is hugely problematic for employers seeking to reward employee achievement. The terms of the Small Benefit Exemption must be amended so that the €1,000 limit applies to the cumulative value of employee incentives across the year. This would give employers the flexibility they need to reward and incentivise staff as they see fit. And any amount above the €1,000 annual limit should be subject to a benefit-in-kind charge.

Mr Reynolds was also critical of the harsh fixed penalties Revenue can impose in the event of any errors in the real-time reporting required by the new ERR rules. “Revenue has paused the imposition of penalties in the first year to give employers time to adjust to the new rules. But the reality is that an employer who inadvertently omits to report any small benefit or payment made to an employee of the remote working daily allowance and business travel and subsistence expenses, all of which are non-taxable, faces a €4,000 penalty even though there may be no risk of an underpayment of tax.

And, because these payments have to be reported in real-time, the penalty could apply even where an omission is discovered by an employer and subsequently reported to Revenue at the earliest opportunity.

Such a penal sanction is wholly disproportionate and places an unjustifiable burden on smaller businesses with limited resources. We believe the level of the penalty should be replaced with a more appropriate sanction.

The Institute pointed to the potentially negative impact of the ERR rules on small local businesses who supply gifts such as flowers to mark births, marriages and death, or Easter eggs and cakes bought by an increasing number of employers seeking to reward and retain staff in a tight labour market.

The restrictions of the Small Benefit Exemption and the disproportionate fixed penalties for any ERR breaches makes rewarding staff a risky business, and employers are likely to stop giving their staff these small tokens of appreciation. This will not be good news for the local florist, the baker or the chocolatier,” said Mr Reynolds.

The Institute has also called for legislative changes to address the restrictive conditions that are excluding many small and micro enterprises from availing of the existing business tax reliefs. “SME supports have a significant role to play in building an innovative and productive indigenous sector which is essential for the diversification of Ireland’s economic base as a counterweight to our over-reliance on the multinational sector.

The Institute also highlighted the increasingly competitive battle for inward investment as the larger economies in Europe enter the fray, enabled by the greater flexibility in EU State aid rules for all member states.

In a post Pillar Two world, an obvious way for Ireland to attract and retain inward investment is to simplify our extraordinarily complex tax system. Our interest deductibility regime is among the most complicated in Europe. Compliance with this tangled web of rules has become difficult and costly for businesses. In our view, it represents a reputational risk,” said Mr Reynolds.

He concluded: “The Institute believes that the tax system can be a powerful lever in sharpening Ireland’s competitiveness, and incentivising enterprises to build resilience and take the necessary risks to grow and provide continued quality employment in the current difficult global trading environment.