Classifying an Individual’s Employment Status for Income Tax Purposes.

Update - May 2024 

Following the Press Release below the Revenue have now issued "Revenue Guidelines for Determining Employment Status for taxation purposes"

These Guidelines set out the key elements of the judgment and its implications for businesses engaging employees, workers, contractors or sub-contractors. It is important to stress that the case was concerned solely with the proper tax treatment of the workers concerned.

As stated in the guidelines :

"As outlined throughout these guidelines, there are a number of workers across a number of sectors who will need to be treated as employees for tax purposes, where previously they have been treated as self-employed. It is essential that businesses urgently and comprehensively review arrangements with all workers and determine their employment status for taxation purposes. Where a business previously treated a worker as self-employed, rather than as an employee, and the review of these arrangements by reference to the five-step framework indicates that they are employees for tax purposes, the business must now rectify that position by treating the relevant workers as employees and operating PAYE"

Decision Making Framework

As set out in the guidelines 

"The decision-making framework consists of five questions as follows:

“1. Does the contract involve the exchange of wage or other remuneration for work?”. This is more commonly known as the ‘Work/Wage bargain’ and is explained in more detail in Section 3.1.

“2. If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?”. This is more commonly known as ‘Personal Service’ and is explained in more detail in Section 3.2.

“3. If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?”. ‘Control’ is explained in more detail in Section 3.3.

“4. If these three requirements are met, the decision maker must then determine whether the terms of the contract between the employer and worker interpreted in the light of the admissible factual matrix, and having regard to the working arrangements between the parties as disclosed by the evidence, are consistent with a contract of employment, or with some other form of contract having regard, in particular, to whether the arrangements point to the putative employee working for themselves or for the putative employer.”. ‘All the circumstances of the employment’ is explained in more detail in Section 3.4.

“5. Finally, it should be determined whether there is anything in the particular legislative regime under consideration that require the court to adjust or supplement any of the foregoing.”. ‘The Legislative Context’ is explained in more detail in Section 3.5.

The first three questions are to be viewed as a filter. If any of these are answered negatively, there cannot be a contract of employment. If the first three questions are answered affirmatively, questions four and five must then be considered to determine if a contract of employment exists. The Decision Tree at Section 5 provides a visual representation of how the framework should be applied.

Section 3 analyses each of the five questions in more detail."

October 2023

The Irish Revenue have issued a Press Release following the recent judgment in the Supreme Court in The Revenue Commissioners v Karshan (MIdlands) Ltd t/a Dominos Pizza in relation to the classification of an individuals employment status for income tax purposes. 

The Press Release is reproduced below :

" Last Friday, (20/10/2023), 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). Revenue welcomes this judgment and the significant clarity it provides on these matters.

Justice Murray decided that the question of whether a contract is one “of service” or “for service” should be resolved by reference to the following five questions:

1. Does the contract involve the exchange of wage or other remuneration for work?

2. If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?

3. If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?

4. If these three requirements are met the decision maker must then determine whether the terms of the contract between employer and worker interpreted in the light of the admissible factual matrix and having regard to the working arrangements between the parties as disclosed by the evidence, are consistent with a contract of employment, or with some other form of contract having regard, in particular, to whether the arrangements point to the putative employee working for themselves or for the putative employer.

5. Finally, it should be determined whether there is anything in the particular legislative regime under consideration that requires the court to adjust or supplement any of the foregoing.

In this case, Justice Murray found that the Tax Appeal Commissioner was entitled to conclude that the drivers were employees for the purposes of income tax.

Businesses are responsible for ensuring that the correct taxes are deducted from their employees’ pay (which includes both salary payments and any notional pay received) and remitted to Revenue under Schedule E (PAYE), at the right time.

Revenue encourages all businesses, and any agents representing them, to familiarise themselves with the details of this judgment, which is available on the Court Service website. In particular, any business which currently 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), should review the nature of any such arrangement(s) in light of this judgment and consider any implications it may have for them. It is important to note that this judgment is relevant to a broad range of work and is not limited to delivery drivers.

Revenue provides a range of opportunities for taxpayers to self-review, self-correct or to make unprompted qualifying disclosures of any matters. Where a business considers that it may have previously misclassified a worker as self-employed, rather than as an employee, and wishes to regularise its position, it should do so as set out in Section 2 of Revenue’s Code of Practice for Revenue Compliance Interventions. "

Read More   

Supreme Court Judgment - https://www.courts.ie/acc/alfresco/e4ee7c3d-0e02-4a33-82b7-26458d895138/2023_IESC_24.pdf/pdf#view=fitH

Revenue Guidelines for Determining Employment Status for Tax Purposes : https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-05/05-01-30.pdf

 

 

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Disclaimer :

Whilst every effort has been made to ensure the accuracy of matters covered by this article, no responsibility for loss or damage occasioned by any person acting, or refraining from acting, as a result of matters above. Professional advice should always be sought before acting on any interpretation of matters covered by this article.

27 October 2023

Updated 21 May 2024 (following issuance of the Revenue Guidelines for Determining Employment Status for Taxation purposes 

 

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