The Code of Practice for the Governance of State Bodies 2016 states at Section 8.45 that:

“State bodies should be exemplary in their compliance with taxation laws and ensure that all tax liabilities are paid on or before the relevant due dates.”

There are a number of taxes, namely payroll taxes, Value Added Tax, Relevant Contracts Tax and Professional Services withholding tax, which will be relevant for most public sector bodies. This article aims to focus on two areas, namely the payroll tax issues that arise when individuals are misclassified as contractors along with RCT issues.

Misclassification of individuals as contractors – engaging an external contractor

Public bodies will often have a need to engage an external contractor, for example, where a particular area of expertise is required. Where such a role is filled by an individual, it is important that due consideration is given to that person’s tax status before the engagement commences. The distinction between an employee and a self-employed contractor is a complex area and has been the subject of intense scrutiny by Revenue and the Courts for many years. Often it can be very difficult to determine whether an individual is employed under a contract of service and subject to payroll taxes or whether they could be considered a self-employed independent contractor responsible for their own taxes.

Unfortunately, there is no one test or measure to decide the matter and each individual needs to be assessed on their own facts and merits. While a number of tests have been developed by the Courts over the years and there is some guidance available in Revenue’s Code of Practice for Determining Employment or Self-Employment Status of Individuals, it is important that employers do not take a blanket approach with regards to their application and examine each case in its entirety. The risk of a blanket approach is that often an employee status might be indicated but is not the case in practice and the employer gets this wrong, failing to operate payroll taxes and Employer’s PRSI.

Tests from case law to determine employee or self- employed status

There are a number of tests arising from case law which should be examined when establishing whether an individual is an employee or self-employed.

1. Mutuality of Obligation

Mutuality of obligation refers to the mutual obligation on the organisation to provide work for the individual worker and on the individual to perform that work during each engagement and this must exist for there to be an employment relationship. This test determines whether there is a contract in existence – without it, there can be no contract of any kind. However, the nature of the contract is not determined by this test and once mutuality of obligation is established, the other tests must then be considered.

2. Own Business/Enterprise Test

This test essentially asks if the individual is engaged to perform the services as a business on his/her own account. The Courts have suggested that to own a business involves an element of financial risk and one may potentially incur losses rather than profits. The ability to employ others or provide a substitute is also seen as an indicator of being in business for yourself, as well as providing the tools and equipment for the job.

3. Control Test

The control test was developed at a time when employers exercised significant control over their employees. The test looks at the degree of direction given, in terms of what, how, when and where the work is done. This test is less significant when looking at skilled workers or individuals engaged to provide expertise or a specialism. The Control test and Enterprise test are strongly linked – an individual in business for him or herself is likely to have greater control over their working arrangement.

4. Integration test

The integration test looks at how integral the individual providing the services is to the organisation. It also considers whether the service provider enjoys the benefits of an employment e.g. sick pay, holiday pay and asks whether the individual may be viewed as an employee by an outsider – do they have a desk/office/dedicated phone line/email address/assigned parking space etc.

Summary

The Code of Practice for Determining Employment or Self Employment Status of Individuals states that an important consideration in determining status is whether the person performing the work does so “as a person in business on their own account”. However, no one single test can decide the matter. The facts and circumstances of each relationship must be considered in light of its own facts, case law and Revenue’s guidance. Of course, aside from the tax implications of employment status there are also human resources, employment law and pension issues which may need to be considered.

Relevant Contracts Tax (RCT)

RCT is a withholding tax that applies to payments made by a principal contractor to a sub-contractor under a relevant contract to carry out “relevant operations” (e.g. construction, forestry and meat-processing operations). If these three conditions are satisfied, the person making the payment (i.e. the principal contractor) must notify Revenue of the contract and all payments under that contract to Revenue must be made through the online eRCT system.

The definition of a “principal” for tax purposes is contained in Section 530A (1) Taxes Consolidation Act 1997 and includes local authorities, government departments and most other public bodies within the various subsections. Therefore this tax is particularly relevant for public bodies.

The definition of a “relevant contract” in Section 530 Taxes Consolidation Act 1997 is widely defined and includes a situation where the subcontractor is liable to the principal to carry out the relevant operations, or be answerable for the carrying out of such operations by others, or furnish their own labour or the labour of others in the carrying out of such operations.

For most public bodies, relevant operations will generally relate to construction operations. Again, this is widely defined and goes beyond what would normally be considered as construction type activities. Areas which can particularly cause difficulty are in relation to the various systems which can become part of a building. RCT applies to the installation, alteration and repair of:

• Systems of heating, lighting, air-conditioning, soundproofing, ventilation, power supply, drainage, sanitation, water supply, burglar or fire protection
• Systems of telecommunications

Repairs and maintenance contracts

Contracts that are for repair work, or for repair and maintenance, are subject to RCT. Revenue’s guidance in the Guidance Note for Boards of Management states that a:

“Repair is generally considered to be an operation carried out to fix, mend or restore the building/structure to its previous condition. Examples of repair include the replacement of constituent parts e.g. replacement of glass in a broken window, replace/fix broken tiles, mending faulty boiler.

Maintenance is generally considered to be work carried out to keep the building, structure or associated lands, driveways etc. in proper or good condition. A maintenance contract is not within the remit of RCT.

If the contract provides for a single consideration for the repair and maintenance then RCT should apply to the full consideration, whether or not repairs are actually carried out. If the contract provides that a separate charge should apply where repairs are necessary then only the consideration applicable to the repairs is subject to RCT. Each case should be examined on its own merit.”

This highlights the importance of reviewing individual contracts to ensure that each arrangement is fully assessed from an RCT perspective.

It is also important to note that payments to non-resident subcontractors can also be subject to RCT where relevant operations are carried out wholly or partly in the State. The application of RCT to a payment also triggers a reverse charge VAT obligation for the public sector body.

RCT rates and penalties

The current rates of RCT are 0 percent, 20 percent and 35 percent and the rate which is notified by the eRCT system depends on the compliance status of the vendor in question.

Since 1 January 2015, the penalty which applies where a principal makes a payment to a subcontractor but fails to submit a Payment Notification to Revenue is linked to the tax status of the subcontractor. For example, where the subcontractor is 0 percent rated for RCT purposes, the penalty will be 3 percent of the relevant payments made to the subcontractor. This means that the cost of getting RCT wrong can be very high, even in cases where no deduction would have been required if the eRCT system had operated correctly.

Conclusion

There are many tax considerations which public bodies need to be aware of and the cost of getting the tax implications wrong can be significant. Public sector bodies need to ensure they are cognisant of all their tax compliance obligations in line with the Code of Practice, tax legislation and Revenue guidance.

Sandra Meeneghan is a Tax Accountant within the National Finance Division of the Health Service Executive.