Government planning PAYE crackdown on contract workers

[invest-or]

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.

In my case I have little to no expenses, so am paying a HIGHER effective tax rate as self-employed than as an employee (and on a larger income to boot!).

So what "punishment" can I (and all the IT contractors like me who have little or no expenses) expect from Revenue if I am audited and they say I should be an employee and taxed as same?

Or are they willing to turn a blind eye to it, if no tax revenue is being lost (on my side that is, though it may be being lost on the employer's side)

Has any such contractor reading this been actually been audited? What happened?

 

[T McGibney]

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...

I'd love to hear where you used to work - sounds like a nightmare job to be honest. I've over 20 years experience myself and while I've met a few cowboys in my time, I have to say that my experience of working with contractors has been generally the polar opposite of the picture you portray.

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...

The whole essence of being a professional is the ability to form an independent opinion on a matter and stick by it. If the professional's own ethical compass is not sufficiently robust to withstand challenge from clients who wish to pull a fast one, I would suggest that they should take a long hard look at themselves.

I find that if I explain the pros and cons of expense deductions with clients that they generally take a sensible approach to it.

Even a child will know that overclaims carry a substantial risk of an ultimate tax arrears, interest and penalty settlement. I don't think I have ever lost a decent client by pointing out this simple truth.

I have never heard much anecdotal evidence either of clients moving from one accountant to another until they are told what they want to hear.

If a client is cheeky enough to threaten the accountant with loss of business if they don't agree to a tax or accounting scam, the accountant has only one option - show the client the door.

 

[T McGibney]

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.

But they are separate issues, and yet you are conflating them and by implication, accusing all contractors with significant overheads of tax evasion.

I am not aware of any major scale tax evasion problem amongst contractors manifesting itself in the quarterly lists of tax defaulters, although perhaps you can correct me on this if I'm wrong.

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....

Whose fault is that? And is this 'incentive' real or a figment of your imagination? Just because my neighbour is richer than me doesn't mean that I have an 'incentive' to rob him.

I think only a fairly ignorant person, Revenue official or otherwise, could fail to distinguish between turnover and profit... !

But you said here that the exchequer is losing out because contractors have overheads, both (in your own words) 'legitimate or otherwise'

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.

If you're saying here that the exchequer is losing out because of contractors' overheads, you are implicitly implying that they should be taxed on their turnover.

As for contractors deductions, I don't know many employees who claim a portion of home L&H, phone, broadband...

and I know many contractors who don't claim home office expenses either - including some who are using their home as their registered office and business base. My advice to clients, and to AAM posters, is that such claims usually aren't worth the hassle, even if genuine, as they merely raise the hackles of Revenue inspectors and lead to conflict in the course of audits. And in overall terms, the tax saved is usually rather small anyway.

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.

Has it not occurred to you that this is an international economic phenomenon and its incidence in Ireland is related to our status as a small open economy highly dependent on multinational manufacturing? If you don't believe me, read http://www.amazon.com/Elephant-Flea-Charles-Handy/dp/1578518229 (The Elephant and the Flea) by Charles Handy or any similar book. In my opinion, the Revenue obsession with this area is merely a symptom of their general prejudice towards business people and entrepreneurs.

 

[mandelbrot]

In my case I have little to no expenses, so am paying a HIGHER effective tax rate as self-employed than as an employee (and on a larger income to boot!).

So what "punishment" can I (and all the IT contractors like me who have little or no expenses) expect from Revenue if I am audited and they say I should be an employee and taxed as same?

Or are they willing to turn a blind eye to it, if no tax revenue is being lost (on my side that is, though it may be being lost on the employer's side)

Has any such contractor reading this been actually been audited? What happened?

In such a case the tax problem isn't really the contractor's, since as you say they'll already have paid more tax than they would have as a PAYE employee (i.e. "no loss to Revenue").

It's more likely Revenue would look for the appropriate amount of A class PRSI from the employer, and tell them to operate PAYE on the employment going forward.

(And what would most likely happen is that the employer then makes the employee go through an agency / umbrella company structure, in order to avoid having to register an employment. So the employee would end up bearing the cost of the A class PRSI themselves in future.)

 

[mandelbrot]

But they are separate issues, and yet you are conflating them and by implication, accusing all contractors with significant overheads of tax evasion.

Well, I've drawn attention in my previous post to the fact that they're separate issues! And as we both know, the reality is that a contractor without overheads is in fact most likely not a contractor. So if I've given the impression that I don't think contractors can / should have legitimate expenses then that's my bad, but my (biased) reading of my earlier posts doesn't suggest that to me.

I am not aware of any major scale tax evasion problem amongst contractors manifesting itself in the quarterly lists of tax defaulters, although perhaps you can correct me on this if I'm wrong.

Well I'm sure I don't know much more than you in that regard, but I'd imagine most settlements in those kinds of cases would be below publication thresholds. As for how many such instances there are / have been, who knows. As I keep saying I am only going on my own experience of trying to keep small sole traders on the straight and narrow.

Whose fault is that? And is this 'incentive' real or a figment of your imagination? Just because my neighbour is richer than me doesn't mean that I have an 'incentive' to rob him.

Well, based on the number of threads here and elsewhere about the inequity of the tax credit treatment of self-employment, I think it's fair to say there's an incentive; by which I mean a factor that has potential to influence a person's behaviour. Some people act on incentives, more don't. As for whose fault is it - the State I suppose?!

But you said here that the exchequer is losing out because contractors have overheads, both (in your own words) 'legitimate or otherwise'

just to be clear, I'm not saying the exchequer is losing out because contractors have overheads. I'm saying the state loses out if / when genuine contractors overstate their overheads.

And I'm saying the exchequer loses out when de facto employments are not registered as such and PAYE and PRSI operated. The PAYE credit at its peak was worth 1,830; employer's PRSI at that time was 10.75% (ignoring the difference between S class and A class for the employee).

So a spurious contracting arrangement, where by definition there won't be many, if any, legitimate overheads in what is in fact an employment, was causing a loss to the Exchequer (in the short-term at least), if the pay was greater than €17k. And it's important to note that the beneficiary most likely isn't the employee, but the employer. I feel like I'm getting slammed here for being anti-contractor, when that's absolutely not the case!

If you're saying here that the exchequer is losing out because of contractors' overheads, you are implicitly implying that they should be taxed on their turnover.

I'm not saying (or implying) that - as per my previous point I'm referring to cases where overheads are overstated.

and I know many contractors who don't claim home office expenses either - including some who are using their home as their registered office and business base. My advice to clients, and to AAM posters, is that such claims usually aren't worth the hassle, even if genuine, as they merely raise the hackles of Revenue inspectors and lead to conflict in the course of audits. And in overall terms, the tax saved is usually rather small anyway.

I suppose that's a judgement call; if it's clear cut, it's clear cut, but if it's not then it's the job of an auditor (Revenue or statutory) to ask the question.

Has it not occurred to you that this is an international economic phenomenon and its incidence in Ireland is related to our status as a small open economy highly dependent on multinational manufacturing? If you don't believe me, read http://www.amazon.com/Elephant-Flea-Charles-Handy/dp/1578518229 (The Elephant and the Flea) by Charles Handy or any similar book. In my opinion, the Revenue obsession with this area is merely a symptom of their general prejudice towards business people and entrepreneurs.

That looks like an interesting read, thanks And of course it's occurred to me - I'm well aware of it, I have family and friends who were / are contractors.

There is a reality however that organisations are baulking at the costs and responsibilities associated with employing a workforce, rather than contracting their labour. And in many cases, arrangements are to the detriment of the worker, as I outlined in my reply to Invest-or above. There are wider issues than just the tax aspects, when arrangements are operating to circumvent the legislation in place to protect workers, and often the worker may not know what exactly they're walking into... http://www.boards.ie/vbulletin/showthread.php?t=2056474902

What is this prejudice, as you perceive it? Surely Revenue's function is to collect taxes efficiently and fairly. Entrepreneurs and business people generate a substantial amount of business taxes, as well as being responsible for a substantial proportion of fiduciary taxes, and therefore must get an appropriate amount of Revenue's attention in compliance programmes. If you think Revenue's focus on them is disproportionate, what is your alernative proposal, where should they be focusing (or is everyone fully compliant and it's all a waste of time! )? REAP being extended to PAYE taxpayers, and the thousands of assurance checks etc... PAYE taxpayers relief claims, hardly suggests Revenue are of a one track mind?

 

[T McGibney]

There is a reality however that organisations are baulking at the costs and responsibilities associated with employing a workforce, rather than contracting their labour. And in many cases, arrangements are to the detriment of the worker, as I outlined in my reply to Invest-or above. There are wider issues than just the tax aspects, when arrangements are operating to circumvent the legislation in place to protect workers, and often the worker may not know what exactly they're walking into... http://www.boards.ie/vbulletin/showthread.php?t=2056474902

This is an ideological argument, one which by the way is well refuted by Charles Handy (hardly someone who could be described as an extreme right-winger) in the book I cited. It is also a painfully clear example of the anti-business prejudice of Revenue, which I mentioned earlier.

I would put it to you that it is Revenue's business to administer and control the tax system. It is not Revenue's business to enforce a particular ideology onto a set of circumstances.

Entrepreneurs and business people generate a substantial amount of business taxes, as well as being responsible for a substantial proportion of fiduciary taxes, and therefore must get an appropriate amount of Revenue's attention in compliance programmes. If you think Revenue's focus on them is disproportionate, what is your alernative proposal, where should they be focusing (or is everyone fully compliant and it's all a waste of time! )? REAP being extended to PAYE taxpayers, and the thousands of assurance checks etc... PAYE taxpayers relief claims, hardly suggests Revenue are of a one track mind?

I never mentioned any element of disproportionality in relation to Revenue Audits and sole traders.

I stand by my accusation that Revenue appear to be obsessed with the 'employee v self-employed' question ever since they infamously lost the [broken link removed] in 2008, that basically cut to shreds their previous stance on the subject.

And I would contend that their apparent obsession with this subject is diverting attention away from the real evasion in the country, particularly in the 'private jobs' area of the construction industry, which is exempt from the RCT system.

 

[mandelbrot]

This is an ideological argument, one which by the way is well refuted by Charles Handy (hardly someone who could be described as an extreme right-winger) in the book I cited. It is also a painfully clear example of the anti-business prejudice of Revenue, which I mentioned earlier.

I would put it to you that it is Revenue's business to administer and control the tax system. It is not Revenue's business to enforce a particular ideology onto a set of circumstances.

I would have thought what I said was was factual rather than ideological, and since I haven't read Handy and I'm not sure what you mean I can't rebut it any further. But if Revenue are anti-business, what are they "pro" in your opinion?

I never mentioned any element of disproportionality in relation to Revenue Audits and sole traders.

I stand by my accusation that Revenue appear to be obsessed with the 'employee v self-employed' question ever since they infamously lost the [broken link removed] in 2008, that basically cut to shreds their previous stance on the subject.

And I would contend that their apparent obsession with this subject is diverting attention away from the real evasion in the country, particularly in the 'private jobs' area of the construction industry, which is exempt from the RCT system.

Well that's your opinion, and of course you're entitled to it, but I think we'll have to agree to disagree on this one.

As for the Barry Case, it wasn't a tax case, so it's not exactly fair to say that Revenue lost it, and in fact it's interesting that PAYE & PRSI was operated on the employments in question, so it's not a case that would have given rise to an action involving Revenue.

My understanding of the ruling is that it found the Employment Appeals Tribunal had erred in law by attempting to apply a fundamental test in determining the employment status, rather than considering all of the applicable factors. I don't know what Revenue's previous position was, but the current guidance recognises the various factors that apply in determining employment status http://www.revenue.ie/en/tax/rct/determining-the-correct-employment-status-of-a-worker.html.

I believe Revenue are no more or less obsessed with this issue than any other substantial grey areas, and it is that, as the last sentence of the article you linked above states: "At this stage, as common law is unable to provide a satisfactory definition of what constitutes a contract of service, now may be the opportune time to consider a legislative approach."

 

[T McGibney]

it is that, as the last sentence of the article you linked above states: "At this stage, as common law is unable to provide a satisfactory definition of what constitutes a contract of service, now may be the opportune time to consider a legislative approach."

My understanding as to why this hasn't been done is that the legal advice available to the government (presumably from the Attorney General's office) is said to have cautioned them that any attempt to define in legislation what is meant by a 'contract of service' in the terms previously set out by Revenue would be likely to fail if challenged in the Courts, and that the Courts would be likely to impose a more liberal definition of 'contract of service' which would suit contractors and businesses but utterly undermine Revenue's existing stance.

I have no specific legal expertise to vouch whether or why this would be the case but I have heard some very eminent experts in the field say this and I would tend to trust these people's opinions in general.

Perhaps this explains why there has been no legislation?

 

[mandelbrot]

My understanding as to why this hasn't been done is that the legal advice available to the government (presumably from the Attorney General's office) is said to have cautioned them that any attempt to define in legislation what is meant by a 'contract of service' in the terms previously set out by Revenue would be likely to fail if challenged in the Courts, and that the Courts would be likely to impose a more liberal definition of 'contract of service' which would suit contractors and businesses but utterly undermine Revenue's existing stance.

I have no specific legal expertise to vouch whether or why this would be the case but I have heard some very eminent experts in the field say this and I would tend to trust these people's opinions in general.

Perhaps this explains why there has been no legislation?

Yes, even a reading of that article gives one an idea of the difficulty of trying to legislate the area. But in relation to the emboldened part above, "The Code of Practice was prepared by the ESG in 2001. The ESG consisted of representatives from the Irish Congress of Trade Unions, the Irish Business and Employers Confederation, the Revenue Commissioners and several other Governmental Departments. The remit of the ESG was to seek a uniform definition of “employee” based on clear criteria, which would determine the employment status of an individual." You can't really blame Revenue for their stance, it's not like they went on a solo run.

 

[T McGibney]

Yes, even a reading of that article gives one an idea of the difficulty of trying to legislate the area. But in relation to the emboldened part above, "The Code of Practice was prepared by the ESG in 2001. The ESG consisted of representatives from the Irish Congress of Trade Unions, the Irish Business and Employers Confederation, the Revenue Commissioners and several other Governmental Departments. The remit of the ESG was to seek a uniform definition of “employee” based on clear criteria, which would determine the employment status of an individual." You can't really blame Revenue for their stance, it's not like they went on a solo run.

They would have been better off, in my opinion, going on a solo run than involving ICTU, (who have a vested interest in ensuring that contractors are kept out of unionised workplaces and whose constituent unions have mounted campaigns and strikes to that end) and their discredited 'social partnership' cronies in a process that suited the participants to the detriment of those excluded from it.

The fact that they were unable to convince the government (who were in their pocket in several other respects) to implement their recommendations as legislation would suggest that the exercise was largely futile.

 

[mandelbrot]

They would have been better off, in my opinion, going on a solo run than involving ICTU, (who have a vested interest in ensuring that contractors are kept out of unionised workplaces and whose constituent unions have mounted campaigns and strikes to that end) and their discredited 'social partnership' cronies in a process that suited the participants to the detriment of those excluded from it.

The fact that they were unable to convince the government (who were in their pocket in several other respects) to implement their recommendations as legislation would suggest that the exercise was largely futile.

From your posts on this topic I can't get any sense of what you actually think should happen?! You've given out about Revenue's obsession, and ICTU and the social partners' cronyism. But the fact remains that the existing tax code distinguishes fundamentally between employees, and self employed people.

You seem unhappy at the attempts made by the establishment at trying to codify this distinction, but for the life of me I can't understand what / how you would do if you were holding the reins?

Would you go to self assessment for all, and do away with the PAYE system altogether? If not, then there has to be some way of distinguishing an employment from self-employment, so if they're obsessed with it (and I don't think they are, I'd call it a healthy concern), it's with good reason.

 

[T McGibney]

Revenue's current position on all of this is confusing and at times inconsistent. For example they state, on foot of the ESG guidelines, that the various tests listed are to be considered in each separate case having regard for the circumstances of that case yet on the other hand they tell entire occupational groups such as locum opticians and pharmacists that they are to be regarded as employees in relation to all locum work regardless of circumstances.

What would I like? Well, firstly I would prefer a more pragmatic and logical approach from Revenue and an end to the above inconsistency. I would also like to see them having the gumption to seek definitive clarification of the question in the courts, even if this means that they mightn't get the result they would like.

I think it's important that businesses can make contracting and sub-contracting decisions within a clear and consistent framework without the uncertainty that has arisen in recent years.

 

[Gekko]

The biggest loss to the Exchequer in such scenarios is where there's effectively a fake retirement where the individual involved draws down a tax free lump sum, sets up a company and carries on working for his employer on a contract basis. Not as big a deal since the €200,000 limit came in but an issue nonetheless.

 

[qosimo]

I think the biggest loss to the exchequer is from contractors hired by foreign recruitment agencies paying no tax at all in ireland even though they are living working here. These same contractors also choose not to pay tax in there home country...

 

[z107]

I think the biggest loss to the exchequer are banks.

 

[mandelbrot]

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.

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 ) 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?

I think the biggest loss to the exchequer are banks.

Well considering this thread has been about potential loss of revenue to the exchequer, I think you've gone a bit off topic there with that last statement, but maybe you'd like to follow on from your earlier statement? (Unless that leads off topic as well!)

 

[z107]

Well considering this thread has been about potential loss of revenue to the exchequer, I think you've gone a bit off topic there with that last statement, but maybe you'd like to follow on from your earlier statement? (Unless that leads off topic as well!)

I believe my previous post was quite clear, and on topic:

It is unfortunate that the Irish Revenue has such a nasty attitude towards self-employed.

Revenue work on the assumption of guilty until proven innocent when dealing with self-employed. Even though self-employed contribute such a large amount to the exchequer, in my opinion they are at best treated with contempt, and more typically treated as criminals.

To answer your question, no I would not like to be drawn into this pointless discussion with you. Any discussion regarding the Revenue is bound to be negative and destructive. In a more positive light, I have work to do.

 

[mandelbrot]

Revenue work on the assumption of guilty until proven innocent when dealing with self-employed.

Generalise much?! Who exactly is "Revenue"? Have you personally experienced this assumption in your own dealings with Revenue? You appear to be stating it as fact - so what is this assertion based on? Revenue's published Customer Charter suggests quite the opposite:
http://www.revenue.ie/en/about/custservice/customer-charter.html
Presumption of Honesty

You can expect:

• to be treated as honest in your dealings with Revenue unless there is clear reason to believe otherwise and subject to Revenue's responsibility for ensuring compliance with tax and customs law.

We expect you:

• to deal in an honest way with Revenue by returning the tax and duty which you are due to pay and seeking only those entitlements and credits to which you are due.

Even though self-employed contribute such a large amount to the exchequer, in my opinion they are at best treated with contempt, and more typically treated as criminals.

Again, this time an opinion, and in my opinion a ludicrous one. If a member of the public, self employed or otherwise, was treated in the manner you suggest, there are channels for making complaints http://www.revenue.ie/en/about/custservice/how-complain-revenue.html

 

[M K Brazil]

Very interesting debate and I can't help but add my two cents.

First of all - back to the original point - there is a difference between allowable deductions for sole-traders and self-employed because of 'wholly and exclusively' versus the 'wholly, exclusively and necessarily' test.

Secondly - I think the Revenue's stance re. Locum Doctors tells us a lot about the Revenue's attitude to this debate and I'd very much be in the T. McGibney camp here.

Thirdly, I don't think we should under-play the Employers PRSI aspect.

 

[mandelbrot]

First of all - back to the original point - there is a difference between allowable deductions for sole-traders and self-employed because of 'wholly and exclusively' versus the 'wholly, exclusively and necessarily' test.

A very good point of course!

Secondly - I think the Revenue's stance re. Locum Doctors tells us a lot about the Revenue's attitude to this debate and I'd very much be in the T. McGibney camp here.

(Yay, I thought we'd debated to a standstill!)

I would have to say it seems to me that Revenue's attitude is one of trying to manage a messy situation in an efficient way - it seems perfectly pragmatic and logical to me. Tommy's last post mentioned a need for consistency, and I'd suggest that they are generalising to try to do just that.

To me, what Revenue appear to be saying, "Here is our default position, based on how locum arrangements operate generally - if, given the specific circumstances of your particular locum arrangement, you believe a different treatment is appropriate, then we'll have a look at the various tests." The alternative would be that you'd have half the inspectors in the country tied up applying the courts' tests to every contracting arrangement, indefinitely!

And, as for Tommy's suggestion that Revenue need to go before the courts to get the matter clarified further, no doubt this will ultimately be the way forward, given the difficulty of legislating in the area. But it takes two to tango in that regard - such a case could only come about by way of an appeal against a "contract of/for" decision by Revenue. For all we know there may be a case or cases under appeal already and heading that way, that will stop our bickering..!