Chartered Accountants Ireland understands that a review of the activity of Personal Services Companies which commenced in the South West Region some weeks ago is to be extended nationwide.

Under this new “Services Contractors Project” companies set up by individuals as a vehicle to provide contracting services are being targeted. Revenue defines these as companies “where the main source of income is a contract or contracts for service with a larger company or companies (directly or through intermediaries), the company in question does not appear to have a substantial business separate from these contracts, and in most cases the director(s) are the only employees of the company and pay tax through PAYE.”

Where contractors are being engaged, some businesses for commercial reasons prefer to engage companies rather than individuals. This practice is particularly prevalent within some industries, for example the software industry. What Revenue appear to be challenging are company arrangements where in their view, a disproportionate level of expenses are being charged. The upshot of this is that less income is taxed than would have been the case if the individual had engage directly as a contractor or as an employee, rather than through their own personal services company. Revenue has suggested that as a guideline, valid expenses and costs of administration would reduce contract income by less than 20%.

Revenue Assistant Secretary Mr Tony Buckley wrote to professional associations in January to outline the approach being taken by Revenue. At that stage, the focus was on companies handled through the Revenue Southwest Region (Cork, Limerick, Kerry and Clare), but we now gather that the investigation is being extended nationwide. Cases will be reviewed over the next two months or so. Any settlements with Revenue will attract interest, and penalties under the deliberate default category.

Chartered Accountants Ireland stresses that very many Personal Services companies are entirely valid and in place for sound commercial reasons. The use of limited liability companies is an essential element of normal business practice. Also, especially at a time when employment of any type is scarce, any arrangements which facilitate outsourcing and employment only deserve to be challenged in cases of extreme abuse of the rules. For their part, Revenue point out that their aim is to prevent deterioration of the system, and poor practice becoming the norm.

Nevertheless, where you or perhaps your clients operate Personal Services companies, you need to be aware that a challenge on these tax arrangements by Revenue is likely over the next several months. The other Revenue Project to bear in mind over the next few months is the matching up of Department of Social Protection pensions with Form 11, where Revenue are systematically reviewing declaration of such pensions over the past few years by self-employed individuals.