New Guidelines On Employment Status For Taxation Purposes

If you are a business making payments to individuals, it is important for you to determine their tax status; employed or self-employed. While it is usually clear whether an individual is employed or self-employed, it is not always the case. Revenue guidelines have always set out how to determine an individual’s status. However, there has been an over reliance on an individual’s declaration that they are “responsible for their own tax affairs”.

As a result of a recent Supreme Court judgement in ‘The Revenue Commissioners v Karshan (Midlands) Ltd. t/s Domino’s Pizza’ case, Revenue has published new guidelines to help determine if an individual is employed or self-employed. This is a welcome development as there is no single, clear legal definition of the terms “employed” or “self-employed” in Irish or EU law.

The Revenue Guidelines include a five-question decision-making framework that resolve whether an individual is an employee or self-employed. Following an in-depth review of the guidelines, here, we outline our summary and advice on next steps.

KEY POINTS

• It is the responsibility of the business to correctly determine whether individuals are employees or contractors.
• Each business must review each arrangement it has and apply the 5-step framework to that arrangement. It must not rely on previous decisions by the Department of Social Protection deciding officers or otherwise. For the avoidance of doubt “office holders” (company directors) are always subject to PAYE.
• Businesses not applying the PAYE framework to contractors who should be considered employees will be held accountable.
• A statement that “the sole trader is responsible for his/her own taxes” will not be accepted.

THE 5-STEP DECISION MAKING FRAMEWORK

1. Does the contract involve the exchange of wage or other remuneration for work?

This is more commonly known as the ‘Work/Wage bargain’.

Provided there is payment by a business to a worker for a service, whether agreed in writing or not, there is a contract. The default position of Revenue is that this is likely to be a contract of employment unless it can be clearly demonstrated otherwise.

If the answer to this question is yes – proceed to question 2.

2. Is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?

This is more commonly known as ‘Personal Service’.

This question considers whether the worker must provide the service personally or they have the right to appoint someone else as a substitute, also known as the ‘substitution test’. He or she may be unable or unwilling to do all or part of the work, or never intended to do it themselves. A typical characteristic of an independent contractor or self-employed person is that they are free to appoint other people to complete the job. The more restrictions imposed on the freedom to appoint a substitute, the more indicative it is of being a contract of employment.

If the answer to this question is yes (i.e. the worker cannot substitute someone in) – proceed to question 3.

3. Does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?

Control refers to the ability, authority, or right of a business to exercise control over a worker. This may concern what work should be done, and how, when and where it should be done. It should be borne in mind that the right of the business to exercise control is more relevant than whether they exercise this right. This is especially important when considering engagements with experts. Due to their expertise and specialised training, they may need little or no specific direction in their daily activities. Control over skilled workers would generally not extend to how work is undertaken, rather what is required to be done by when.

The first three questions are to be viewed as a filter. If any of these are answered ‘no’, there cannot be a contract of employment. Questions one to three must be answered ‘yes’ for there to be a contract of employment, with questions four and five then considered.

4. If the above three requirements are met, the decision maker must then consider all the admissible facts and evidence disclosed. He/she must ask – is this information consistent with a contract of employment or the putative employee working for themselves?

5. Finally, is there is anything in the legislative regime under consideration that require the court to adjust or supplement any of the information gathered i.e. are there any mitigating factors?

The Decision Tree provides a visual representation of how the framework should be applied.

WHAT DO BUSINESSES NEED TO DO?

Businesses need to apply the 5-step decision making framework to each contractor and service provider arrangement. Some arrangements may need to be reclassified as employees and added to payroll.

WHAT DO SOLE TRADERS NEED TO DO?

Individuals moving from a sole trader to payroll may encounter higher tax payments. Sole traders may be better off to incorporate their business by setting up a limited company. As a separate legal identity providing a service, expenses can be off set against tax payments.

WHAT INDUSTRIES ARE IMPACTED?

Although the guidelines arose from a case involving a Domino’s Pizza outlet, it does not apply specifically to the courier/ food delivery sector. This guidance applies to all industries.

We are seeing a particular focus on this matter from Revenue in the Irish Film and Music industries. Traditionally, in these industries, several project partners will work together for a number of months as sole traders.

HOW CAN STRATA FINANCIAL HELP?

Are you unsure if the contractors you engage should be considered as employees? For both existing and new clients, we can provide guidance and perform reviews as required.

For sole traders who are being moved onto payroll, we would be delighted to speak to them directly. We can ensure they explore all avenues open to them including company incorporation if deemed appropriate.

Contact us today on 01-6311400, or email Sinéad directly at sk@stratafinancial.ie