For many years there has been a divergence of opinion between Institutions of the State on the one hand and employers and individuals on the other as to whether a person hired to carry out certain duties or undertake a certain project for another person should properly be regarded as an employee or as self employed for Tax purposes.

Alan Lawlor Tax Partner in Wallace O Donoghue Accountants and Registered Tax Consultants now summarises the tax issues arising and both current and likely future developments.

Employed v self employed – a general background

The landmark Denny case in the late 1990s set out in clear terms that it is the real nature of the economic relationship between two parties that determines whether in any given set of circumstances an individual hired to carry out work for another person is to be regarded as an employee or as a self employed person.

In the case of an employee a contract of service exists and tax is deducted at source, while in the case of a self employed person a contract for service exists and that person  settles their own tax affairs with Revenue through the self assessment system.

In simple terms, to be regarded as self employed a person must genuinely be in business on their own account and must not be under the direction and control of the person to whom they report in carrying out a particular assignment. A genuine self employed person takes the economic risk in relation to the assignment which he has been engaged to perform and will generally be paid only on completion of a specific task, which is clearly specified at the outset of the business relationship in a contract or in written terms of engagement.
 
The genuine self employed person should have considerable freedom as to how  and when the work is performed within specific deadlines and should be free to carry on similar work for other parties at the same time.  In addition he or she is free to delegate some or all of the work to his or her own employees.

These factors are normally reflected in the type of business apparatus that a self employed person would have both in terms of a physical business infrastructure and in such matters as having their own business name registration , professional letterheads, VAT and PAYE tax registration etc.

By contrast an individual will generally be regarded as an employee when he or she is expected to carry out the task or “duties” at a particular location between certain specified hours and  will not take the economic risk in relation to how and when the particular assignment is undertaken.

Such an individual will usually be paid based on number of hours taken to complete  a particular task and will  not be in business on their own account.

They are retained to work under the direction and control of the person for whom they carry on these duties and will be covered in relation to the conduct of their work by their employers insurance policy.
 
In most cases it will be quite clear cut as to whether or not a particular person is an employee or not.

However in cases of dispute there is usually no one defining factor that will be conclusive as to whether a particular person in any particular circumstances is definitively to be regarded as an employee or as self employed.

In short as stated in the Denny case it is necessary to look at all of the facts and realities of the overall business relationship between the parties on the ground in attempting to come to a “correct” conclusion.

Contentious issues – how disputes arise

The fact that uncertainties or disputes arise at all in this area is largely due to a number of popular  misconceptions in relation to the how the guiding principles outlined above are to be properly interpreted.

Allied to this is the fact that Revenue and indeed the Department of Social and Family Affairs are anxious to ensure that where possible tax and PRSI are deducted at source from all payments made to employees as this is the most efficient means of tax collection available and in addition ensures that employee social insurance benefits are maximised.

This does not always tie in with the views of “employers” who  for a variety of reasons including the costs associated with Employers PRSI and provision of employment rights to individuals who are subject to deduction of PAYE/PRSI at source, would prefer if the individuals were regarded as self employed individuals.

Some of the areas regularly giving rise to dispute in this area are as follows:

1. Reliance on wording of a contract

In some cases contracts between parties are worded in a way that purports to show that a contract for rather than of services exits. This includes wording such as “You are deemed to be an independent contractor” or “you are not entitled to holiday leave and must pay your own tax”. Such terms do not

in any way change the real nature of the business relationship between the parties and can not be relied upon as a way of changing what is really a contract with an employee from a business perspective into a genuine contract with a self employed person.
 
2.  Reliance on information from Revenue as basis for claiming self employment status

In the past obtaining a tax clearance certificate or a VAT number was seen as de facto acceptance by Revenue that a particular person was to regarded as self employed and could obtain payment from an other party without deduction of tax at source. Again, while this is certainly an indication that a person may genuinely be in business on their own account it is not definitive and will not necessarily prevent Revenue or the Department of Social and Family Affairs from arguing that in any given circumstances there is an employer/employee relationship between the parties.

3. Engagement with a number of “employers” at any one time

As stated above, this is a factor which Revenue regard in their own published material as indicative of a person being engaged in business on their own account as a self employed person. However at present in the general medical sector for example,  Revenue (at the behest in many cases of the Department of Social and Family Affairs) are challenging the self employed status of locums engaged by Doctors co-ops and pharmacies.

This challenge is based on the view held by Revenue that in many cases the locum is under the direction and control of the pharmacy or Doctors co-op in the manner in which they engage in their day to day duties and as a consequence should be taxed at source as employees.

Similar issues arose in other sectors in the past including part time lecturers and tutors in third level Institutions, in the Film industry – where helpful guidance was recently issued, - and IT professionals in the multinational sector where further focus is also likely to arise going forward.

Likely future developments

- Revenue practice

Revenue have indicated in a recent ebriefing in December 2009 that they will continue to focus attention on the arrangements currently in place in the medical sector in relation to the retention of locums. Although conceding in principle that there should not be a “one cap fits all” approach it is evident from the manner in which they successfully pursued  a case to appeal before Christmas 2009 that they have a definite view that in most cases locums should be regarded as employees.
 
In their view, the taxation of locums or indeed any other person for that matter is beneficial for that person as it ensures entitlement to a PAYE tax credit of €1,830 per annum not otherwise available and also as all payments are subject to PRSI at class A1, ensures that unemployment and other benefits are more readily available than if these individuals were to be treated as self employed with earnings liable to PRSI at class S1.

While there is no doubting the merits of these arguments the fact remains that there will always be cases where individuals (particularly as stated above at present in the medical profession) will genuinely regard themselves as self employed and as a consequence should not be treated as employees for tax purposes.

It is likely that in future Revenue focus will also be directed towards other industry sectors and we would strongly recommend that all existing arrangements in place are reviewed as soon as possible in the expectation that sooner rather than later they may be subject to Revenue scrutiny.

- Possible change in tax legislation

In the past the establishment of a limited company as a means by which a contractor would engage with a third party was seen as the safest way of ensuring that the contractor could not be regarded as an employee of that third party. The advent  of the income levy and restriction in the income ceiling relevant to qualifying pension premiums for tax purposes has added to the tax advantages of trading through a limited company. At the time of writing there is some speculation that the forthcoming Finance Bill will contain measures aimed at counteracting at least some of the advantages of these arrangements.
 
While we await developments in these areas with interest in the coming weeks there is no doubt that the classification of individuals as either employed or self employed for tax purposes will continue to be contentious for some time to come.

For more information or confidential discussion on any matter referred to above please contact Alan Lawlor on 01 8880830 or 087/9096392