The Revenue Commissioners have increased their focus on the tax treatment of self-employed contractors in the past few years and audit activity in this area has been quite significant.
The question of whether an individual is an employee or a self-employed “contractor” for tax purposes is a complex question which in all cases turns on the facts and circumstances at hand. It is an area which has been under increased scrutiny from the Revenue Commissioners in recent years and most employers are very aware of the liabilities that may arise where individuals are miscategorised as “self-employed” and payments are made to them without operating payroll taxes. The potential financial risks for the employer can be very significant as interest and penalties may apply on underpaid payroll taxes.
Another related area of focus is the area of “one man” companies where the employer may be contracting with a corporate vehicle but where the individual employed by the “one man” company is essentially acting, for all intents and purposes, as an employee would. Following a pilot audit in 2011 of contractors in the south-west region, the Revenue Commissioners launched a national Contractors Project in mid-2013 aimed at specific issues that they had identified from their earlier audit activity.
To date, the Revenue Commisioners’ focus has been on ‘one-man’ companies, or companies formed by a small number of individuals who have entered into contracts with larger companies to provide services of individuals, mainly in the fields of (a) professional, scientific and technical services (circa 60%), (b) information and communication services (c. 38%) and certain administrative and support services (c. 2%).
The Revenue Commissioners have focused on cases where the individual contractors providing the services were both directors and employees of their companies and, as PAYE was generally found to have operated on the salaries they drew from their companies, their focus was on cases where they considered an excessive level of expenses were being reimbursed tax-free to the directors/contractors.
In selecting cases for audit, the Revenue Commissioners looked for cases that exhibited the following characteristics:
(a) Travel and subsistence expenses amounted to more than 20% of turnover;
(b) Other expenses amounted to more than 20% of turnover; or
(c) The combination of the above amounted to more than 25% of turnover.
Over the last 12 months, the Revenue Commissioners closed 385 audit cases with additional liabilities arising in 78% of those cases and settlements agreed in a further 13% of those cases. These cases alone have resulted in a tax-take of just under €6 million for the exchequer, together with penalties of just over €1.75 million (30%) and interest of approximately €1.6m. A further 368 companies remain under audit and the current focus is on closing out these cases and concluding this phase of the project.
From their reviews so far, the Revenue Commissioners determined that a large amount of travel and subsistence expenses were being incorrectly reimbursed to directors/contractors on a tax-free basis as business expenses where the Revenue Commissioners determined them to be personal in nature. One of their main findings was that costs of commuting (i.e. travelling from home to work) were being reimbursed without deduction of tax, when the general tax principle is that the cost of travelling from home to work is not a genuine business expense and cannot be reimbursed tax-free. This would apply for travel between home and the client location where the normal place of work is considered to be the premises of the client.
In recent correspondence, the Revenue Commissioners provided further clarity on their position that if an employee has a fixed base, and is required to attend for work at some other location, then expenses may be reimbursed, calculated on the distance between the location and the employee’s home or fixed base, whichever is less. If however there is no fixed base the expense of getting to work is the cost of commuting, for which no deduction is allowed.
During the course of their reviews, the Revenue Commissioners determined that, in their view, there was a widespread misunderstanding of the tax rules governing travel and subsistence. The Revenue Commissioners published two Tax Briefing articles to address the matter and in which they outlined their view that where services of an individual are being provided through an intermediary, the expenses which may be claimed are similar to those that may be claimed by an employee.
Given the outcome of the project to date, the Revenue Commissioners have been reviewing their findings to determine how best to reflect this in future audit activity. At the same time, they are examining the impact of emerging practices in related areas, for example the use of contractors operating abroad, to ensure that they pose no risks of loss to the exchequer.
Accordingly, companies engaging the services of individual contractors in whatever capacity would be well advised to complete a self-review of their procurement procedures to ensure they are robust and that they have not left themselves open to a potential PAYE exposure.
Source: KMPG Tax division – written by Billy Burke, tax partner at KPMG