Dáil Éireann Debate, Thursday - 19 June 2014
40. Deputy Ciarán Lynch asked the Minister for Finance the taxation implications of the widespread practice, especially in the pharmaceutical industry, of persons being engaged on a self-employed basis to perform duties similar to their company employee colleagues; and if he will make a statement on the matter. [26377/14]
View answerThere are a number of differences between the tax treatment of a self-employed individual and an employee. The main ones are:
- self employed individuals are required to account to the Revenue Commissioners for income tax, USC and PRSI through the self assessment system whereas, in the case of an employee, the employer is required to account to the Revenue Commissioners for income tax, USC and PRSI through the PAYE system,
- self employed individuals who earn income in excess of €100,000 are liable to USC at a rate of 10% on income over that amount whereas the maximum rate for employees is 7%, and
- the PAYE income tax credit does not apply to self employed individuals.
In addition, an employer must pay employer's PRSI in respect of remuneration paid to employees. This does not arise in the case of payments made to a self employed individual.
I am informed by the Revenue Commissioners that, in recent years, they have become increasingly aware of instances where companies purport to engage individuals as independent self employed contractors when, in practice, they perform duties in a similar manner to employees. The Revenue Commissioners examine such arrangements on a case by case basis, taking account of the facts and circumstances of each case, to determine if such individuals are genuinely self employed. In arriving at a determination, the Revenue Commissioners have regard to the criteria set out in the Code of Practice for determining Employment or Self-employment Status of Individuals, and also relevant case law. If the Deputy has concerns in particular cases that individuals are not genuinely self employed, the Revenue Commissioners would be happy to examine any such cases.
I am also advised by the Revenue Commissioners that there is a national audit project (known as the "contractors project") under way since July 2013, concerned with service professionals who provide services through a company under contract to third-party clients, including clients in the pharmaceutical industry referred to by the Deputy.
In 2011, through normal audit activity, Revenue identified a potential issue in situations where professionals providing engineering services formed companies (of which they were both directors and employees) which then contracted with client companies, often multinationals, for the provision of the services of the individual. A characteristic of these companies was that they typically had no other business, and no non-director employees. In a number of such cases examined, the level of expenses reimbursed tax free to the director/contractor was found to be excessive and in several cases included expenses which either had not been incurred at all, or were personal rather than business-related.
A pilot project operated in Revenue's South West Region in 2012 and 2013 which audited 119 companies with additional liability in 107 cases, and a further 24 directors of contractor companies have also agreed settlements. The total additional tax liability was €2,801,977. Penalties of €906,433 (32%) and interest of €857,216 were imposed. By this time it was clear that there was a pattern of behaviour which warranted a national audit project. A list of companies was compiled from the business sectors identified in previous audits, where there were few or no employees apart from the directors, and which exhibited one of the following characteristics: (a) travel and subsistence expenses amounting to more than 20% of turnover; (b) other expenses amounting to more than 20% of turnover, or (c) the combination of both amounting to more than 25% of turnover. The cases fell into the categories of professional, scientific and technical services (60%), information and communication services (38%) and certain administrative and support services (2%). In addition to cases from this list, audits which remained open in the South West Region at 1 July 2013 were subsumed into the national project.
Since 1 July 2013, a total of 385 company audit cases have been closed, with additional liability in 299 cases, and a further 49 directors of contractor companies have also agreed settlements. Additional tax of €5,969,630 has been identified, with penalties of €1,765,995 (30%), and interest of €1,639,623. At the moment 368 companies remain under audit, and Revenue is now moving to bring these cases to finality. Most of the audits now open indicated their intention to make a disclosure to Revenue some months ago and availed of a concession whereby Revenue agreed to allow additional time and to provide guidance in compiling disclosures. Revenue has now written to those taxpayers advising that the process of preparing disclosures must be completed urgently if the benefits of voluntary disclosure (which encompass lesser penalty and non-publication provided certain specific conditions are met) are to be preserved.
In the course of the contractors project it has become clear that the provision of services under contract is a large and growing practice with many thousands of contractors involved in a range of professional services sectors. Many of these professional contractors operate companies in a traditional mode, where they employ staff, operate from an established place of business, and provide a range of specialised services on the open market. For such companies, Revenue's project has generally found little or no additional tax liability arising from travel expenses. Another, quite different type of contracting also exists in considerable numbers, where an individual's services are obtained, often through the facilitation of a recruitment agency, and a contract is concluded with the individual's company. In some cases, a company may be provided to the individual for this purpose. Typically, the work is done at the client's premises and the contractor's company has no other business. Between these two types of contractor there are a huge number of individual variations.
Revenue published two tax briefing articles in 2013 which made it clear that, where the services of an individual are being provided through an intermediary, as opposed to the traditional provision of goods or services to the market generally, the expenses which may be claimed against tax liability are similar to those that may be claimed by an employee. Thus for example an individual going to work abroad under a contract must bear the cost of doing so him/herself regardless of whether the contract is with the person or with his/her company.
As the current phase of the contractors project comes to a conclusion, Revenue will review the outcomes in detail and decide how best to reflect them in future audit activity. At the same time, Revenue will examine the impact of emerging practices in other areas, for example in the use of contractors operating abroad, to ensure that they pose no risks of loss to the Exchequer.
