By formal submission to Department of Finance and Department of Social Protection

March 2016

Introduction

The tax rules which determine an employee versus a self-employed taxpayer and the corresponding social insurance system are complicated and in need of modernisation. Therefore, the launch of a public consultation by the Department of Finance and Department of Social Protection on the topic of self-employment arrangements and structures is a first step in this task. However, it may not be ideal to focus initially only on the problem of non-collection of PRSI and tax-free expense claims among other perceived PRSI and income tax advantages in cases of bogus self-employment.

The consultation document suggests a number of possible options for addressing the tax and PRSI issues arising from the use of intermediary-type structures and the self-employment arrangements which are:

1. treat the worker as a class A contributor, with the employer contribution to be paid by the end-user. This option would not impact on workplace employment law;
2. treat a payment made by an end-user, either to defined classes of intermediary or to defined classes of individual, to be a payment to the worker liable to tax under Schedule E. This option would not impact on workplace employment law;
3. where an intermediary-type structure is in place, apply a surcharge to undistributed income of the intermediary; or
4. where an intermediary-type structure is in place, deem any undistributed income of an intermediary company to be paid to the individual who carried out the work.

In this submission, we set out that modern day work practices are a reflection of commercial factors such as the need for flexibility for businesses and workers rather than tax or social insurance avoidance schemes. It is an established fact that businesses in Ireland have one of the highest tax compliance rates in the world. Compliant businesses are not interested in damaging their reputation or incurring the punitive penalties that come with Revenue Audits for the sake of PRSI savings. The tax and social insurance system is currently less favourable to the self-employed compared to employees. There are savings accruing to the Social Insurance Fund from not having to pay out certain entitlements to self-employed contributors. For these reasons options i and ii as set out in the consultation need to be reconsidered. We suggest the focus should instead be on establishing a new optional PRSI rate for the self-employed to offer some of the benefits which they cannot currently avail of, in particular the jobseeker’s benefit.

The recommendations set out under options iii and iv are already legislated for through robust anti-avoidance tax laws for close companies and service companies. Companies are established for commercial factors such as limited liability. The costs of running a business through a company outweigh any perceived PRSI savings which a thorough review of modern day work practice should take cognisance of.

Changes in work practices reflect commercial realities

One outcome from the recession has been a move from traditional employment from the “permanent and pensionable” job towards contracting and temporary positions. Many Irish businesses are still fragile after the recession. They may be in seasonal businesses, which have peaks and troughs which could be understaffed when busy but unable to fund workers with no work on hand during slack periods. Many employers don’t want to have to repeat letting employees go, with all the financial and worker morale costs to their organisation that inevitably accompany lay-offs. The additional 10.75% PRSI cost of an employee is often not the biggest concern of such business; rather they are concerned about business continuity and will employ part time staff rather than contractors. This concern is borne out by the Quarterly National House survey which has found that regular part-time working among employees increased significantly from 17.7% in 1998 to 24.2% (388,570) of all employees in 20141. Suggestions that contract positions are created by business solely to avoid PRSI obligations and provide scope to take advantage of the income tax system are often unfounded. Suggestions that companies are set up to facilitate PRSI and tax savings do not appear to take account of the set up and ongoing annual costs associated with running a business through a company which quickly add up to erode any perceived tax or PRSI savings.

An analysis2 of how the Social Insurance Fund has been financed over the years 2006 to 2014 shows that the composition of the fund has remained relatively consistent between the years 2006 to 2014 with self-employed contributions over this period accounting for approximately 5% of the Fund.

PRSI Contributions	2006	2007	2008	2009	2010	2011	2012	2013	2014
Employer Contribution	74.66%	74.62%	74.46%	73.84%	74.54%	73.53%	73.62%	72.95%	73.15%
Employee Contribution	19.94%	19.93%	20.46%	21.77%	20.53%	21.78%	21.81%	21.61%	21.68%
Self-employed Contribution	5.40%	5.45%	5.08%	4.39%	4.93%	4.69%	4.57%	5.43%	5.17%

The threat to the exchequer as posed in the consultation from changes in work practices is therefore not particularly evident based on data.

However, the Irish social insurance system and the income tax system does need to build in recognition of the fact that the world of work has changed and the activities of some workers no longer fit into tidy categories of employee and self-employed.

Reform how PRSI is contributed and entitlement to benefits

We do not think that reform of how Pay Related Social Insurance is collected can be carried out without reforms to the structure of entitlements which flow from the contributions. We think the key to eliminating any abuses that may exist is to create a PRSI contribution regime for the self-employed which offers attractive benefits of participation, even if the resulting contribution regime is somewhat higher.

It would appear unduly harsh to create a requirement for contract workers to pay a PRSI charge equivalent in the aggregate to the Class A employee and employer contribution. In some cases this would result in a PRSI charge of 14.75%. The self-employed are entitled to an earned income tax credit of only one third of the PAYE credit available to their employed peers, and they are liable to a USC surcharge of 3% on earnings over €100,000. A PRSI charge of such magnitude would further discriminate against the sector by creating a combined marginal rate of over 60%.

Flexibility against such a high charge could be achieved by assigning fewer benefits for lower contributions. The following table lists the benefits derived from PRSI for Class A employees (combined contributions of up to 4% EE and up to 10.75% ER) and the benefits derived from PRSI for Class S (self-employed contribution of 4% subject to a general minimum contribution of €500).

Benefit	Class A	Class S
Adoptive Benefit	✓	✓
Carer’s Benefit	✓
Illness Benefit	✓
Health and Safety Benefit	✓
Invalidity Pension	✓
Maternity Benefit	✓	✓
Occupational Injuries Benefit	✓
State Pension (Contributory)	✓	✓
Guardian’s Payment	✓	✓
Treatment Benefit	✓
Jobseeker’s Benefit	✓
Widow’s, Widower’s or Surviving Civil Partner’s Pension (Contributory)	✓	✓

People are vulnerable and if they pay social insurance they should receive protection. The current scheme of social insurance works for many people in traditional employment, and for that matter in traditional contract roles. We suggest that work should be undertaken on arriving at a new optional PRSI rate for the self-employed to offer some of the benefits which they may not currently avail of, in particular the jobseeker’s benefit. It would be necessary to ensure that the Social Insurance Fund could pay for these benefits. The PRSI charge must be linked to the benefits when a claim is made and priced accordingly.

Income tax practices and intermediary type structures

We have already noted a distinct bias within the income tax system against the self-employed taxpayer in comparison to how employees are taxed. This bias is prevalent for all self-employed taxpayers from those on modest earnings right through to high income earners. The difference is clearly illustrated in the Budget ready-reckoners prepared by the Department of Finance. The analysis for Budget 2016 for example shows that the effective rate of tax on a single employee earning €20,000 is 7.7%. The self-employed person earning the same amount pays tax at an effective rate of 14.9%. This is taxation based not on how much people earn, but on how they earn it.

Self-employed individuals are entitled to deduct expenses in arriving at taxable income, but only if such expenditure has been wholly and exclusively incurred for the purpose of the trade and therefore such deductions are trading expenses rather than tax allowances. Revenue audits in recent years have focused on ensuring that expenditure deducted by the self-employed meets the wholly and exclusively criteria. As such, it is misleading to state that the self-employed have more scope to claim “unwarranted tax-free expenses” or can avail of more generous tax planning. The PAYE credit of €1,650 is a benefit when it comes to paying tax. Non-application of the 3% USC surcharge on high earners is also a benefit when it comes to paying tax. Neither of these benefits are fully open to the self-employed taxpayer.

The consultation also suggests that pension planning is more generous for the self-employed. Traditionally, pension options on retirement were more flexible for the self-employed than for employees. However, Finance Act 2011 extended all of the options once only open to the self-employed such as the ARF option to all defined contribution pension arrangements. The self-employed individual is solely responsible for funding his or her own pension fund; whereas the employee can receive tax relief on contributions he or she makes to an occupational pension scheme and also can benefit from contributions an employer can make to the employees’ pension scheme. In reality, tax relief on pensions is more weighted in favour of employees rather than the self-employed.

Similarly we would contend that the corporation tax regime is already sufficiently robust to deal with issues which arise in the context of intermediary structures. Comparisons are made in the consultation document with arrangements in the UK. However it should be noted that the Irish law governing the taxation of closely held companies are stricter than those which operate in the UK and are more effective in addressing the phenomenon of so-called tax motivated incorporation. Difficulties which arise with intermediary companies may be a phenomenon more associated with enforcement issues rather than legal structures. We suggest that there should be engagement on the operation of the existing rules before any changes are proposed to underlying legal structures.

Arrangements for PRSI Collection and Refunds

Refunds of PRSI are the responsibility of the Department of Social Protection. Indeed the general administration of PRSI such as the provision of directions and information on the insurability of employment is also the responsibility of the Department of Social Protection. However, the collection of PRSI is the responsibility of the Revenue Commissioners. We recognise the importance of a coherent collection agency. It may now be less than efficient to have one arm of government responsible for collection of a tax while another arm of government is responsible for refunds of the same tax or for determinations on how to apply that tax. We point to recent enhancements to information exchange on benefit payments between the Department of Social Protection and the Office of the Revenue Commissioners as evidence of the efficiencies which might be achieved.

As part of the fundamental reforms required for PRSI, we recommend that both the collection and the refund of overpaid PRSI should be conducted by the same government body. Possibly as the bulk of the work involves collection currently conducted by Revenue, refund arrangements should also be conducted by Revenue.

Conclusion

This submission recommends the avoidance of solutions which deprive businesses and workers of much needed flexibility. If there are perceived issues arising from the use of service companies, there is no shortage of existing legislation to address such issues. We also call for the realignment of the tax and social insurance systems to end discrimination in the treatment of the self-employed.

Source: Chartered Accountants Ireland. www.charteredaccountants.ie

1. Cited in A Study on the Prevalence of Zero Hours Contracts among Irish mployers and their Impact on Employees 2015 by The Kemmy Business School, University of Limerick

2. Reports of the Comptroller and Audit General 2007 to 2014 on the Accounts of the Social Insurance Fund.