Government planning PAYE crackdown on contract workers

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Anyone got more details / links on this possible development?

Government planning PAYE crackdown on contract workers

Thousands of contract employees will be brought into the PAYE net for the first time as the government moves to close a loophole in the tax system.

The move is designed to ensure that contractors who are de facto employees cannot avoid PAYE by being paid through limited companies they establish. The changes will also apply to certain professionals, such as doctors and pharmacists, who carry out locum work but avoid PAYE due to their status as short-term contractors.

More at [broken link removed]
 
There doesn't seem to be any publicly available information at the moment other than the article in the business post.

The most likely scenario would be for Revenue to follow the lead of the UK Revenue and model any changes on the IR35 & MSC legislation that currently exists for contractors in the UK. If that is the case it wouldn't mean an end to contracting as we know it but would mean an increase in the level of compliance.

If the UK model is applied in Ireland contractors who are PAYE employees of umbrella companies or personal limited companies should have nothing to be concerned about - in the UK the majority of contractors affected were those using managed service companies, i.e. contractors who were joining umbrella/managed companies as director/shareholders. In the eyes of HMRC these structures were seen as a deliberate attempt to avoid tax/ni and the use of them was banned with the introduction of the MSC (Managed Service Company) legislation.

Any new legislation will put pressure on agencies/recruiters to ensure their contractors are compliant, in the UK they introduced transfer-of-debt legislation which can make an agency liable for the unpaid taxes of a contractor if non-compliant limited company structures were used. As a result of this most UK agencies will not issue/sign off on contracts until they are satisfied with the compliance of the individual and the limited company.

It's worth noting that the article says that contractors use limited companies to avoid PAYE but in most cases that is not true - contractors using umbrella companies are usually PAYE employees of the umbrella company, and most contractors using their own personal limited company would also be paying tax on PAYE basis, albeit as employees of their own company. It also implies that contractors are drawing dividends instead of salary to save tax but that is not the case either, it is true in the UK but in Ireland the same rate of tax applies to dividends and salary.

We'll wait and see what news the Finance Bill 2010 brings!

Regards

podowd
http://www.prima.ie
 
Would seem to be very similar to the crackdown in the construction sector many years ago when the C2 and RCT system was introduced.

Many 'subcontractors' were in fact considered employees of the main contractor and by avoiding the whole employment issue, PAYE and PRSI was not being paid on behalf of those who should really have been in the employ of the main contractor rather than self-employed.

If you are contracted to a company providing a service on a long term continuous basis, regardless of the financial benefits to the contractor, you should probably be considered an employee and thus gain holiday benefit etc and have PRSI paid on your behalf.

I would think it is this PRSI loop that they are trying to stop and also to intercept the 'taxfree' payments to the contractors when, unless C2 certified, 35% would be deducted and held by Revenue pending a repayment.
 
I doubt it's the PRSI loop they are trying to close as it would arguably cost the State more money if the "contractors" were treated as employees in terms of the increased benefits of Class A over Class S.
 
Hi,
Would all income from a contract then be liable for PAYE. At the moment I have a business loan which I need to service for two years. Would the UK model, if Revenue adapted that, allow me to pay PAYE on the income - Business Loans? Or would I have to service those business loans after I have paid tax/prsi?
 
Hi,
Would all income from a contract then be liable for PAYE. At the moment I have a business loan which I need to service for two years. Would the UK model, if Revenue adapted that, allow me to pay PAYE on the income - Business Loans? Or would I have to service those business loans after I have paid tax/prsi?

Hi

Only the interest element of a business loan is an allowable deduction, this would be the case at the moment, even before any changes are introduced. Are you a sole trader or ltd company? If you are a sole trader, and the new rules require you to be a PAYE worker, you would have to service the loan from after-tax income and there would be no tax relief, not even on the interest. If you have a ltd company the interest on a business loan would be an allowable deduction from company profits but the capital repayment would not.

It's difficult to you give you a clear answer without further details, feel free to email/pm me if you want further clarification.

Regards

podowd
http://www.prima.ie
 
The legistlation in the UK was brought in to close two significant loop holes:

1. Paying all your wages in one month therefore hitting a national insurance limit for that month limiting the amount you pay.
2. Taking a tiny wage and the rest in in dividends was another way of avoiding national insurance.

National Insurance in the UK used to be about 12% therefore it meant it was a significant saving. If dividends were not considered regular income then maybe they did not breach the tax thresholds as well?

Anyway these breaks never applied to Irish Contractors so there is no loop hole to close in that respect.

UK contractors are still able to deduce their tax bill be legit expenses so a copy of UK legistaltion to here wouldn't change things here as non legit expenses are obviously not allowed as is.

Unlikley that companies here will get hit with employees taxes as compnaies will always need a flexible workforce for short time hire any impeachment upon that is a further cost on employment. They would just hire foriegn consultancy firms instead. The more to India is bad enough - why add more incentive?.

Ironic that the government is considering this now as contractors were the first to get laid off when the recession begun. Many dont have jobs.

If the legistlation is too onerous it will encourage people to contract out of their own country leaving Irish contract Jobs attractive for Foreign personal but not Irish workers.
 
PAYE claw back on doctors’ locum work

The Revenue Commissioners are seeking to force doctors who carried out locum work to pay PAYE taxes for the past four years.

The tax authority has written to GPs across the country, stating that locum doctors must now be treated as employees for tax purposes. Traditionally, locums have been regarded as self-employed and have not been obliged to pay PAYE.

The Revenue has told GPs that it intends to claw back PAYE for the past four years.

more at [broken link removed]

I don't like the way they are talking about clawing back PAYE for 4 years in the past!

Wonder will they do this to contract workers?

How much (very roughly) EXTRA tax would this be for, say, a sole trader contractor, given that he/she has already paid all income tax & levies due as a sole trader?
 
I don't see what they need to crack down on. There is already a Corporation Tax surcharge (15%) in place for contractor companies retaining profit. Unless they mean auditing this more closely.

Forcing contractors to become employees will loose the renvene money as the salary will be at least 30% less (if the contractor is not let go altogether and becomes unemployed).
 
Revenue Commissioners to get extra powers in new Finance Bill

...

New rules designed to bring contract workers in the PAYE net will also be outlined.

...

More at [broken link removed]
 
Are these the new powers they are talking about? What exactly does this mean - from the finance bill.
SECTION 7 - TAX TREATMENT OF COMPANY DIRECTORS

Section 997A of the Taxes Consolidation Act, 1997 to be amended to confine the amount of the credit
available to any individuals to a maximum of the actual amount of tax deducted from that individual.

 
More media coverage:

Tax squeeze on high-paid TV stars

Top media stars as well as building subcontractors are among those set to face paying more tax under new examinations of their status by the Revenue Commissioners, the Sunday Independent has learned.

Revenue is now examining the tax status of many of those involved in "outsourcing" to see whether they should or should not be classified as employees.

http://www.independent.ie/national-news/tax-squeeze-on-highpaid-tv-stars-2052069.html
 
None of it makes any sense unless theyre talking about introducing IR35. Either way, theres nothing in the finance bill about it that I can find anyway. If they want you to pay PRSI, surely then you can claim dole etc for periods of unemployment? It will cause a lot of contractors to leave the country. Hardly a good thing as they tend to do the most work. I cant understand what the report is about. Aparently IR35 in the UK has been a complete flop.
 
Have there been any developments on this in the last year? I haven't seen anything in the media.

Going by http://www.deloitte.ie/tc/ a self-employed worker on, say, 80k, pays MORE tax than a PAYE worker on 80k, so how could revenue apply any extra tax/penalties if they found you working as a self-employed contractor, but not meeting the criteria?

Or would the employer take a hit, because they are avoiding employers PRSI?
 
Have there been any developments on this in the last year? I haven't seen anything in the media.

Going by http://www.deloitte.ie/tc/ a self-employed worker on, say, 80k, pays MORE tax than a PAYE worker on 80k, so how could revenue apply any extra tax/penalties if they found you working as a self-employed contractor, but not meeting the criteria?

Or would the employer take a hit, because they are avoiding employers PRSI?

You can't do a straight comparison though, as contractors will always have a certain amount of expenses, legitimate or otherwise, that will act to reduce their taxable income. So what you would find is the PAYE employee with taxable salary of 80k would probably be paying tax (somehow or other) on 60k - 70k if they were a contractor... hence the loss to the exchequer.
 
You can't do a straight comparison though, as contractors will always have a certain amount of expenses, legitimate or otherwise, that will act to reduce their taxable income.
What do you mean by this?

The implication is that that somehow self employed are better off than regular employees, when in fact the opposite is the case.
Either the expense is legitimate, and will withstand an audit, or it is not. This holds for both employees and self employed.

It is unfortunate that the Irish Revenue has such a nasty attitude towards self-employed.
 
So what you would find is the PAYE employee with taxable salary of 80k would probably be paying tax (somehow or other) on 60k - 70k if they were a contractor... hence the loss to the exchequer.
It's important to note in this regard that:

- contractors forego the PAYE credit so much of the supposed 'tax loss to the exchequer' is illusory.

- traders are taxed on income, not turnover. Revenue don't seem to understand that a contractor with 70k turnover and 15k overheads is only as well off in gross terms as their counterpart who earns 55k income from employment. In terms of after-tax income the contractor will actually be a good bit worse off.

- contractors' deduction entitlements under the Irish income tax code are hardly generous, a lot less lucrative for example than the tax-free expense allowances enjoyed by civil servants and other employees, so the conspiracy theory that hordes of employees are trying to pretend to be contractors is largely unfounded.

- if a contractor is incurring significant overheads associated with their trade, this by Revenue's own standards would indicate that they are in business of their own account.
 
What do you mean by this?

The implication is that that somehow self employed are better off than regular employees, when in fact the opposite is the case.
Either the expense is legitimate, and will withstand an audit, or it is not. This holds for both employees and self employed.

What I mean, is that I have had years of experience first hand experience of preparing the accounts and tax returns of people working as contractors in a variety of fields (primarily engineers), and seeing the kinds of things that, almost without exception, they want to have claimed as deductions. And when you would explain this simply won't fly, you get the kind of reaction you get from young teenagers "but everyone else gets to do it, why can't I!?" And then when they play their trump card, whereby they'll go move accountant to someone who'll keep their tax bill lower, you discover how malleable your employer's professional ethics are...

[EDIT]: The classic example of what I'm talking about with "expenses, legitimate or otherwise" is the example of someone who decides that their place of business is their home office, in some cases quite rightly, but in others not so. All motor & travel from there to places where they do on-site work, is deducted as business travel expenses. Depending on where they live and where they are contracting, this can be a substantial amount. If their next door neighbour got a PAYE job in the same place, the cost of getting to/from there everyday would be paid out of their after-tax income.

So Upsidedown, I'm expressing an opinion formed over time, which I feel is valid based on my experience in the area, if that's OK with you.

I could turn what you've said on its head (upsidedown, so to speak :p) and say that you are implying that self employed are worse off than regular employees, when in fact the opposite is the case.
Or we could be sensible and say that depending on the circumstances, either can be the case. In many instances contractors are paid a premium in excess of what an employee would be paid, which more than covers the loss of entitlements, and in other instances they aren't, and get screwed by the company contracting their services.

It is unfortunate that the Irish Revenue has such a nasty attitude towards self-employed.
What do you mean by this?
 
There are two separate issues being discussed here really - the first is the extent to which employees may be incorrectly classified as contractors, and the second is the extent to which contractors take the proverbial when filing their tax returns. From first hand experience and anecdotally, they are both fairly extensive and serious issues.
It's important to note in this regard that:

- contractors forego the PAYE credit so much of the supposed 'tax loss to the exchequer' is illusory.
True enough, but in my experience this inequality creates an immediate incentive to fudge the expenses to rebalance things in the mind of a lot of people...

- traders are taxed on income, not turnover. Revenue don't seem to understand that a contractor with 70k turnover and 15k overheads is only as well off in gross terms as their counterpart who earns 55k income from employment.
I think only a fairly ignorant person, Revenue official or otherwise, could fail to distinguish between turnover and profit... !
In terms of after-tax income the contractor will actually be a good bit worse off.
I presume you're referring to a case where a contractor's net/taxable profit is the same as an employee's. But again, it varies from case to case, contractors are often in a position to negotiate a much better hourly rate than employees. Or not, in others.

- contractors' deduction entitlements under the Irish income tax code are hardly generous, a lot less lucrative for example than the tax-free expense allowances enjoyed by civil servants and other employees, so the conspiracy theory that hordes of employees are trying to pretend to be contractors is largely unfounded.
As for contractors deductions, I don't know many employees who claim a portion of home L&H, phone, broadband...
And I don't think it's necessarily the case that there's a conspiracy theory that people are pretending to be contractors. It's more likely that, for whatever reason, the proportion of people being being "employed" as contractors, or through umbrella companies rather than being directly employed under employment contracts, has increased in recent years, and is therefore an area that requires scrutiny. As much to ensure employers fulfil their statutory obligations for PRSI etc... as anything else.

- if a contractor is incurring significant overheads associated with their trade, this by Revenue's own standards would indicate that they are in business of their own account.
Absolutely, but again, that is contingent on the overheads claimed being legitimate. My earlier post refers my own experience in that regard.
 
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