In this article, I will outline some of the tax considerations that need to be taken into account when employing someone temporarily in your business or indeed entering into any arrangement which would not be considered a normal employer/employee relationship.

This area has been subject to significant recent Revenue attention, particularly in the Construction Sector and more recently in the Medical Sector regarding the engagement of Pharmacists and Medical Locums.

The initiative is a joint initiate with the Department of Social and Family Affairs and is mainly concerned with ensuring that commercial arrangements are classified correctly and employers are deducting and accounting for payroll taxes correctly. It also ensures that individuals are correctly entitled to various reliefs under Social Welfare Legislation particularly in the area of unemployment benefit and assistance and statutory redundancy.

Revenue have issued guidance regarding the engagement of Pharmacy Locums and Medical Locums and, in Revenue's published view, such arrangements are generally regarded as employment contracts of the respective pharmacy and medical practices. It is likely therefore that other sectors of the economy will be examined in due course by Revenue.

It is imperative that all businesses ensure that they properly classify commercial arrangements with individuals as either employees or self-employed otherwise the business runs the risk of exposure to significant liabilities to taxation for incorrect operation of payroll taxes.

The distinction between an individual who is engaged as an employee under what is termed a contract of service as distinct to someone who is hired as an independent contractor under a contract for services has significant tax consequences for the Business engaging these individuals.

Generally, a self-employed individual is in business on their own account and are responsible for the payment of their own taxes and charging VAT where they meet registration thresholds etc. An employee on the other hand is not in business on his own account and is paid through the payroll system of the employer and the responsibility for operating taxes correctly lies with the employer.

A self-employed individual is generally taxed under Class S PRSI whereas many employees are taxed under class A PRSI, therefore the business paying their remuneration is liable for employers PRSI on the payment in addition to the deduction at source for employees PAYE and PRSI on the payment.

The general criteria in deciding whether an individual is an employee, and not self-employed, can be useful in determining the status of any individuals engaged or commercial arrangements entered into by a business.

An individual is an employee of an organisation if:

• They are under the control of the individual or organisation that engaged them and they are directed as to how, when and where the work is to be carried out. This is the principal test in determining employment status. It is important to note that an individual could have considerable freedom and independence in carrying out their work and will still be considered an employee by Revenue. This may result in some temporary engagements of consultants and professionals being classified as an employment relationship even though the individuals concerned have significant freedom in the performance of their duties. This treatment is certainly in line with recent published guidance by Revenue concerning pharmacists and medical locums
• They are entitled to a fixed remuneration or fixed pay for their work regardless of how long it takes to complete.
• They cannot sub-contract the work to a third party even if they are engaged themselves.
• They supply labour only and/or work set hours or a given number of hours per week or month for the business.
• They do not provide any equipment.
• They are not exposed to personal financial risk in carrying out the work. This would be particularly relevant regarding insurance arrangements that various contractors have for public liability insurance etc.
• The individual only works for one person or for one business. Revenue's view is that an individual can work for several employers at the same time and still be considered an employee.
• It is also important to be aware that certain terms of engagement or clauses in a contract such as “you are not an employee of the organisation and are an independent contractor” or “you shall discharge your own tax liabilities” have minimal or little value in Revenue's opinion in determining that an individual is self-employed.

If the individual comes within most or all of the above criteria, the individual will be regarded as an employee and the organisation or individual who engages them must operate normal PAYE/PRSI taxes.

The classification has serious implications for any business recruiting temporary staff or consultants, as the onus is on the business to correctly classify the arrangements with an individual as an employee or as a self-employed individual. If an individual is incorrectly classified as self-employed, Revenue can look to the business to pay the outstanding income tax, employers PRSI and levies and may levy interest and penalties for failure to operate correctly.

It is likely that Revenue will commence a review of other sectors within the economy and will issue guidance regarding their opinion of the correct classification of commercial arrangements particularly in the area of Engineering and IT Consultancy.

Paul Dillon is Tax Partner with Duignan Carthy O'Neill. Email: pauldillon@dcon.ie