Payroll Taxes / Social Security

Self-employed v Employee – Developments

The whole question of whether an individual is an employee (operating under a contract of services) or is self-employed (operating under a contract for services) is an area that frequently arises in the context of Revenue audits. Increasingly the Revenue are challenging the self-employed status of contractors. This is not just the case in Ireland but also internationally.

The inadvertent misclassification of individuals as contractors rather than as employees can have significant tax and legal implications for the employer. Earlier this year it was reported in the media that RTE had undertaken a review wherein it identified that it may have misclassified up to 157 workers as self-employed. While news on the matter has mostly related to possible back benefits owed to the employees, misclassification of individuals as self-employed can give rise to underpayments of PAYE/PRSI.

The question of whether an individual is self-employed or is employed is not always clear cut and is based on principles derived from UK and Irish caselaw. Revenue do provide guidance in the form of their Code of Practice for Determining Employment or Self-Employment Status of individuals in which they set out the factors that they take into account when determining whether someone is self-employed or an employee. These factors are based on principles established in caselaw as there is currently no legislative definition of what constitutes a contract of service or contract for service.

The Tax Appeals Commission considered the applicable law in this area in October 2018 in a case relating to the employment status of food delivery drivers in the context of a takeaway. The Appellant in the case argued that the drivers were carrying out their activities as self-employed individuals whilst the Revenue Commissioners argued that they were employees. After a detailed review of relevant caselaw, the Appeals Commission concluded that the drivers were employees on the basis of the facts and circumstances including a lack of bargaining power of the drivers as they had no input in relation to the terms of their contract which was drafted by the Appellant and the drivers were not able to negotiate the rates of pay. Another test applied by the Tax Appeals Commission, known as the enterprise test, found that the driver’s did not advertise their services, they could not subcontract their work and their business did not take on credit risk or business risk.

This determination is useful as it sets out in detail the relevant factors for determining the employment status of individuals and how the relevant tests are to be applied. The Appeal Commissioners ruled in favour of the Revenue in this case agreeing that in the circumstances the individuals were employees for payroll tax purposes. It is understood that the taxpayer has sought leave to appeal the ruling so there may be another twist in this yet.

In light of the above, employers should review their systems to ensure that they are correctly operating payroll taxes on payments to individuals. Practices may have developed over time and it is important that employers take the opportunity to review their practices and procedures in light of the Appeal Commissioner’s determination. Of particular note to employers, the Appeal Commissioner stated that “It is well established that minimal weight will be attributed to the categorisation given by the parties to their working relationship”. Some employers may operate under a misconception that simply having a contract for services under which the “contractor” undertakes to account for taxes is sufficient. This is clearly wrong - it is not possible to “contract out” of an employment relationship i.e. the relationship arises as a matter of fact, regardless of the formal contractual arrangements between the parties. The explicit statement of the Commissioner to this effect is worth noting.

Getting this wrong can lead to a significant cost for employers in relation to back taxes, interest and penalties. It is also important to note that where employees are misclassified as self-employed, the employer may also be liable for breaches of employment legislation. Where individual contractors are being engaged, care is required and it is important that specialist advice is obtained.

Electric Vehicles - Benefit in Kind

As previously noted, Finance Act 2018 extended the BIK holiday on electric cars to December 2021 (original end date was 31 December 2018). It also imposed a restriction on the BIK exemption on vehicles with an original market value over €50,000 i.e. if the original market value exceeds €50,000, normal BIK rules will apply to the excess. The exemption applies to both new and used electric vehicles. This exemption is for vehicles that get their motive power from electricity only. It is not available for hybrid engine cars. It is also worth noting that the legislation also provides that a taxable benefit in kind will not arise in respect of expense incurred by a corporate employer in (or in connection with) the provision of a facility for the electric charging of vehicles in any of its business premises, where all directors and employees can avail of the facility. Thus, the cost of electricity used to charge electric vehicles in the workplace can be exempt from BIK provisions.

The 0% BIK rate is beneficial both for employees and employers as the employee will not pay tax on the benefit and the employer will not have to pay employer’s PRSI of 10.95 per cent on the benefit.

Extension of Social Welfare for Self Employed

The Government recently made the decision to extend the social welfare payments to self-employed individuals who may be experiencing a lull in trade and so have insufficient income to live off. The Jobseekers allowance is to be made available to the self-employed from November of this year. The availability of the allowance will be dependent upon the individual paying an, as of yet, unspecified amount of PRSI contributions. However, where the amount of PRSI contributions are insufficient to qualify an application for means tested jobseekers allowance can still be made.

With the availability of this additional benefit allied with the disparity between PRSI contributions of PAYE employees and the self-employed, there is likely to be pressure on the Government to increase the PRSI rate for the self-employed from the current rate of 4%. 

UK/Ireland Common Travel Area (CTA) - Memorandum of Understanding

One of the major concerns arising from Brexit was the status of the Ireland/UK CTA. The CTA is a reciprocal arrangement between Ireland and the UK, the Isle of Man and the Channel Islands. The CTA has allowed British and Irish citizens to travel freely between the UK and Ireland, reside in either jurisdiction and work in either jurisdiction. The CTA has been in place since 1922, pre-dating Ireland and the UK’s entry into the EEC and was effectively a collection of reciprocal agreements between the two jurisdictions that had developed over time.

Táiniste Simon Coveney and UK Cabinet Office Minister David Lidington have signed a Memorandum of Understanding that will guarantee the rights offered under the Common Travel Area (CTA). The signing of the memorandum will mean the rights of both citizens are protected after the UK’s exit from the EU while also ensuring that Ireland will continue to meet all obligations under EU law.

From a social welfare perspective, the above is welcome as currently EU legislation provides certainty for EU citizens working in multiple EU jurisdictions (including the UK). In the event of the UK exiting the EU, then the EU provisions will no longer apply. Therefore it is particularly welcome that the Irish and UK Governments have included social welfare within the CTA provisions, which should retain the status quo as regards payment of social insurance and as regards access to benefits.

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Ronan McGivern

Taxation Partner

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