Dáil Éireann Debate, Wednesday - 26 June 2024
38. Deputy Catherine Connolly asked the Minister for Finance the options available to a person under the new guidelines for self-employed persons to allow for recognition as a self-employed sole trader without the necessity to register as a limited company; and if he will make a statement on the matter. [27505/24]
Amharc ar fhreagra39. Deputy Catherine Connolly asked the Minister for Finance to provide details of the review undertaken in advance of the publication of the new guidelines for self-employed persons which obliges a sole trader to register as a limited company in order to be recognised as self-employed; and if he will make a statement on the matter. [27506/24]
Amharc ar fhreagra40. Deputy Catherine Connolly asked the Minister for Finance the options available to a person (details supplied); and if he will make a statement on the matter. [27507/24]
Amharc ar fhreagraI propose to take Questions Nos. 38, 39 and 40 together.
Where an individual is engaged under a contract of service, i.e. as an employee, he or she is taxable under Schedule E, and income tax, USC and PRSI is deducted from their employment income through their employer’s payroll system on or before when a payment is made (the PAYE system). For the avoidance of doubt, “office holders” (e.g. Company Directors) are always subject to PAYE.
Where an individual is engaged under a contract for service, i.e. as a self-employed individual taxable under Schedule D, they will generally be obliged to register for self-assessment, to pay preliminary tax and file their own income tax returns using the Revenue Online Service (ROS).
Each business making payments to individuals is obliged to correctly determine whether individuals are employed or self-employed based on the facts and circumstances of each relationship and payment. There is no single, clear legal definition of the terms “employed” or “self-employed” in Irish or EU law.
On 20 October 2023, in a unanimous decision, the Supreme Court delivered an important judgment on the key factors to be considered when classifying an individual’s employment status for income tax purposes. The detailed judgment was delivered by Mr. Justice Brian Murray in The Revenue Commissioners v. Karshan (Midlands) Ltd. t/a Domino’s Pizza. The case was concerned with whether the delivery drivers were independent contractors under a “contract for service” and taxable under Schedule D of the Taxes Consolidation Act 1997, or employees under a “contract of service”, and taxable under Schedule E of that Act (PAYE).
The judgment provides an extensive review of relevant case law, and succinctly summarises it through the provision of a five-step decision-making framework. The decision-making framework consists of five questions that is to be used to resolve the question of whether a contract is one of service (employee) or for service (self-employed).
On the same day, Revenue issued a press release which encouraged any business which engages contractors, sub-contractors or other workers on a self-employment basis, i.e., where that worker is not treated as an employee of the business for income tax purposes, to review the nature of any such arrangement(s) in light of this judgment.
While the judgment related to companies engaging individuals as delivery drivers, as a decision of the Supreme Court, it has application across all sectors. Revenue, in carrying out its statutory function, is obliged to apply the judgment.
The Deputy poses questions about individuals incorporating as limited companies and obligations in relation to this arising from the judgment. It is important to note that the judgment applies to the tax implications for businesses who engage individuals and whether such individuals are to be treated as self-employed or employees. The judgment does not apply to businesses that engage companies to carry out work.
The decision of a business as to whether it wishes to engage an individual or a corporate is a commercial decision. If a business engages a corporate entity, the judgment is not relevant, as a company will never be an employee for tax purposes. If however, the business decides to engage an individual, it must apply the five-step framework from the judgment to determine whether or not that individual is to be treated as an employee for tax purposes. In the same way, it is for an individual who is supplying services to a business to decide whether he or she wants to operate as an individual or operate through a corporate structure.
I am advised by Revenue that its treatment of services supplied through a companies, for example Personal Services Company, or a Managed Services Company, which are common structures through which contracting services are supplied, has not changed. Revenue does not “look through” corporate structures, except in very limited circumstances specifically provided for in the Taxes Consolidation Act 1997.
To assist taxpayers in understanding their tax obligations, Revenue publishes detailed guidance on many topics, on its website and in the various Tax and Duty Manuals (TDMs). Revenue developed a detailed TDM, to outline its position in relation to the application of the judgment and to assist businesses who engage individuals to carry out work.
Prior to the publication of relevant TDM, Revenue sought input from across Government and relevant external stakeholders to seek feedback on the development of the draft manual. A copy of the draft was shared with 13 key external stakeholders, including professional representative bodies, trade unions, employer bodes and representative bodies from specific sectors. Feedback from the stakeholders, where appropriate, was incorporated into the final draft.
The TDM (Part 05-01-30) was published on 21 May 2024 and is available on the Revenue website at the following link: www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-05/05-01-30.pdf
The detailed TDM runs to 58 pages and contains 19 examples, based on real cases. The key message in the TDM is that in determining whether an individual is self-employed or an employee, the business (entity engaging the person) must apply the five-step framework by references to the facts and circumstances on the individual case.
It is for the business who engages the person to make the determination. It is not a matter of choice, either for the business, or the individual. Businesses are free to disagree with elements of the TDM and self-assess based on the facts and circumstances of their own case. Revenue will then, in the normal way, look at cases based on risk and make assessments or amended assessments where appropriate and a right of appeal will exist, which may lead to future litigation in this area.
In relation to the specific case the Deputy refers to, it appears that the individual is being engaged by a number of businesses to carry out various functions. It is for those businesses to apply the five-step framework determine whether or not the individual is an employee. The TDM represents Revenue guidance and has not imposed this approach, it has always been a matter for the business engaging the individual to determine whether that individual is an employee for tax purposes, which determines whether that business is obliged to operate PAYE. The Supreme Court has confirmed how such a determination is to be made and each business will make a decision in relation to each engagement and operate accordingly on a self-assessment basis. It is also a matter for such businesses to decide if they wish to change their business model and only engage companies to carry out work, as opposed to individuals.
