Dublin Tax Accountant

Determining the employment status of an individual – New Irish Revenue Guidance

 

 

On 20th October 2023, the Supreme Court delivered its unanimous decision in The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza [2023] IESC 24 (the “Karshan Case.”  It was held that delivery drivers of Domino’s Pizza should be treated as employees and not independent contractors.  Today Revenue published their “Guidelines for Determining Employment Status for Taxation purposes” which outlines a five step decision making framework to determine the employment status of individuals for tax purposes: eBrief No. 140/24

 

 

According to Revenue:

 

“Where an individual is engaged under a contract of service, i.e., as an employee taxable under Schedule E, income tax, USC and PRSI should be deducted from his or her employment income through their employer’s payroll system on or before when a payment is made.

 

Where an individual is engaged under a contract for service, i.e., as a self-employed individual taxable under Schedule D, he or she will generally be obliged to register for self-assessment, to pay preliminary tax and file their own income tax returns using the Revenue Online Service (ROS).”

 

 

 

The guidance material asks the following questions:

 

 

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

 

In other words, there must be an exchange of work for wage/remuneration before a working relationship can be categorised as a “contract for service.”

 

A contract is considered to be an engagement where there is a payment by the business to the individual regardless of whether or not there is a written contract in place.

 

 

 

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 test distinguishes between a situation where a worker provides services to a business personally versus where it’s possible for that worker to engage others to provide the services on his/her/their behalf.

 

 

 

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?

 

The court judgment placed a strong emphasis on the degree of freedom the individual has to decide how the work is carried out.

 

It is essential to establish the level of control the business has over the individual worker.  For example, can it decide what the particular duties are, as well as how, when and where the work should be carried out?

 

Is the worker carrying on the business of the organisation he/she/they work(s) for or is this individual working on their own account?

 

In other words, to what degree is the worker/individual integrated into the business?

 

 

 

4. If the above three requirements are satisfied, the decision maker must then determine whether the terms of the contract between employer and worker and the related working arrangements are consistent with an employment contract, or with some other form of contract.

 

Apart from reviewing any written agreement in place, it is vital that the facts of the working arrangement are examined to establish if the individual is working for the business or is providing services on his/her/their own account.

 

 

 

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.

 

 

 

If the answer to any of the first three questions set out above are “No”, a contract of employment is not deemed to exist and the individual should not be treated as an employee.

 

If, however, the answer to the first three questions is “Yes”, then questions 4 and 5 of the framework must be considered to determine if a contract of employment exists.

 

The Guidelines also include nineteen practical examples which demonstrate the application of the five step framework to assist in determining how workers, in a number of different situations, will be taxed.

 

 

 

Conclusion:

 

  • If required by Revenue, taxpayers must be able to demonstrate, using the five step framework, how they determined that a worker should be treated as self-employed rather than as an employee.

 

  • If a business previously treated a worker as self-employed rather than as an employee, but having reviewed the five-step framework it would appear that this individual is in fact an employee for tax purposes, the business must immediately rectify the situation by operating payroll taxes.

 

  • If the business has incorrectly treated the worker as a self-employed contractor rather than as an employee, the Revenue Commissioners may seek the repayment of uncollected payroll taxes, Employer’s PRSI as well as interest and penalties.

 

  • It is advised that businesses carry out an urgent and comprehensive review of the five step framework to determine employment status of their workers.

 

 

 

If you require any assistance, please contact us.

 

 

 

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

BUDGET 2023 – Ireland

 

 

Today, Minister for Finance, Paschal Donohoe T.D., and Minister for Public Expenditure and Reform, Michael McGrath T.D. presented Budget 2023.

 

 

GLOBAL MOBILITY & EMPLOYMENT

Minister Donohoe announced an extension to a number of existing personal tax reliefs including:

  • Special Assignee Relief Programme (SARP) is to be extended to the end of 2025.  The minimum income threshold for an employee to qualify for SARP is being increased from €75,000 to €100,000 for new entrants.  Existing claimants will not be affected by this change.  In other words, this higher qualifying threshold will not apply to current claimants availing of the relief.
  • Key Employee Engagement Programme (KEEP) is to be extended to the end of 2025.  The lifetime company limit for KEEP shares will be raised from €3 million to €6 million.  KEEP is also being modified to provide for the buy-back of KEEP shares by the company from the relevant employee.
  • Foreign Earnings Deduction (FED) which is a relief for employees who are tax resident in Ireland and who travel out of the State to temporarily carry out employment duties in certain qualifying countries was extended for a further three years to the end of 2025. FED provides relief from income tax on up to €35,000 of income.
  • Another significant development was the doubling of the Small Business Exemption from €500 to €1,000 effective from 2022. Employers will also be permitted to grant an employee two vouchers/non-cash awards in a single year, provided the cumulative value of the two vouchers does not exceed €1,000.

 

 

PERSONAL TAX

Key measures include:

  • A significant increase in the Standard Rate Cut-Off Point to €40,000 for single individuals and €49,000 for married couples with one earner. This means that a single person can now earn an additional €3,200 before paying tax at the 40% Income Tax rate.

 

  • An increase of €75 in the Personal Tax Credit, Employee Tax Credit and the Earned Income Tax Credit (all currently set at €1,700). For the tax year 2023 onwards the new tax credits be each be €1,775

 

  • An increase of €100 in the Home Carer tax credit. From 2023 it will be increased to €1,700.

 

  • A reintroduction of the rent tax credit of up to €500 for renters in the private sector for 2023 to 2025. It will be possible to claim this tax credit on a retrospective basis in relation to rent paid in 2022.  One credit per person can be claimed per year.

 

  • The Sea-going Naval Personnel Tax Credit has been extended to the end of 2023.

 

  • An increase in the ceiling of the 2% USC rate from €21,295 to €22,920.

 

  • The exemption from the top rate of USC for medical card holders, and those aged over seventy years earning under €60,000 will continue beyond 2022. In other words, the reduced rate of 2% USC will be extended until the end of 2023.

 

  • There is no increase to Employer’s PRSI rates.

 

 

ENTERPRISE

  • The Temporary Business Energy Support Scheme (TBESS) was introduced to support trading businesses. The scheme will be open to businesses carrying on a Case I trade that are tax compliant and have experienced a significant increase in their natural gas and electricity costs. Businesses carrying on trading activities will be eligible for a refund of 40% on the increase in electricity and gas prices, subject to a monthly cap of €10,000 per trade.  Detailed information on the scheme has not yet been published, however, it is believed the scheme will operate by comparing the average unit price for the relevant period in 2022 with the average unit price for the corresponding period in 2021. If the increase in average unit price is more than 50% then the business will be eligible for the scheme. Businesses will be required to register for the scheme and to make claims within the required time limits.  This scheme is subject to State Aid approval from the EU.

 

  • Amendments will be made to the R&D tax credit regime with respect to how repayments are made under the scheme which will ensure the regime is regarded as a “qualifying refundable credit” for the purposes of the Pillar Two Model Rules. Currently the R&D tax credit is firstly offset against current and prior year corporation tax liabilities followed by repayment over three instalments. The current system is being changed to a new fixed three-year payment system. A company will have an option to call for payment of their eligible R&D Tax Credit or to request for it to be offset against other tax liabilities. In other words, the changes will enable taxpayer companies to call for the payment of their R&D tax credits in cash or for these to be offset against its tax liabilities in this three-year fixed period. The existing caps on the payable element of the credit are being removed. The first €25,000 of a claim will now be payable in the first year.  Transitional measures will be introduced for one year for those that already engaged in R&D activities and claiming the credit

 

  • An extension to the Knowledge Development Box regime for a further four years to 31st December 2026. Currently the KDB provides for a 6.25% effective rate of corporation tax on profits generated from exploiting certain assets, including patents and software developed through R&D activities carried out in Ireland. In preparation for the changes under the OECD Pillar Two agreement, the effective rate under the KDB regime is to be increased from 6.25% to 10%.  The policy document released by the Department of Finance states that the commencement of this rate will be determined by reference to international progress on the implementation of the Pillar Two Agreement but it is expected in 2023.

 

  • The extension of the Film Corporation Tax Credit until December 2028. Film relief is granted at a rate of 32% of qualifying expenditure which is capped at €70 million.

 

 

 

PROPERTY

 

Help-to-Buy Scheme

The scheme will continue at current rates for another two years and will expire on 31st December 2024

 

 

 

Vacant Homes Tax (“VHT”)

A VHT will apply to residential properties which are occupied for less than 30 days in a 12 month period.

Exemptions will apply where the property is vacant for “genuine reasons.”

The applicable tax rate is three times the existing local property tax (“LPT”) rate

 

 

 

Residential Development Stamp Duty Refund Scheme

The stamp duty refund scheme will continue until the end of 2025.

The stamp duty residential land rebate scheme allows for a refund of eleven-fifteenths of the stamp duty paid on land that is subsequently developed for residential purposes. was due to expire on 31 December 2022. It has been extended to the end of 2025.

 

 

 

Pre-letting Expenses on Certain Vacant Residential Properties

The limit for landlords claiming allowable pre-letting expenses is to be increased from €5,000 to €10,000.

The vacancy period is to be reduced from 12 months to 6 months.

 

 

 

Levy on Concrete Blocks, Pouring Concrete and other Concrete Products

A 10% levy was announced in response to the significant funding required in respect of the defective blocks redress scheme. A 10% levy will be applied to concrete blocks, pouring concrete, and certain other concrete products

This levy applies from 3rd April 2023.

 

 

 

VAT

 

9% VAT rate for hospitality and tourism sector

The 9% VAT rate currently in place to support the tourism and hospitality sectors will continue until 28th February 2023.

 

 

 

9% VAT rate on electricity and gas supplies

The temporary reduction in the VAT rate applicable to gas and electricity supplies (from 13.5% to 9%) will be extended to 28th February 2023.

 

 

Farmers’ Flat-Rate Addition

The flat-rate addition is being reduced from 5.5% to 5% in accordance with criteria set out in the EU VAT Directive.

This change will apply from 1st January 2023.

 

 

Zero-rated supplies

From 1st January 2023 VAT on newspapers, including digital editions will be reduced from 9% to 0%.

 

 

 

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

Research & Development (R&D) Tax Credit – Ireland

globe on newspaper2

 

 

Ireland’s Research and Development tax credit system is a valuable tax based incentive, providing major benefits to both multinational companies and SMEs operating in Ireland.  The R&D tax credit was first introduced in the Finance Act 2004 and has been subject to various amendments in the subsequent Finance Acts.

The credit operates by providing up to 25% of R&D expenditure incurred by a company on qualifying R&D activities (both revenue and capital) in a tax credit or in cash (subject to certain conditions being met). This 25% tax credit can be claimed in addition to the normal 12½% revenue deduction available for the R&D expenditure.  Therefore, the total tax benefit to a limited company is 37½% being the 12½% standard corporation tax rate plus the 25% R&D Tax credit.

 

 

How can the Credit be used?

Companies are entitled to a credit of 25% of the incremental R&D expenditure incurred for periods commencing on or after 1st January 2015.

The credit can be used to:

  • Reduce the company’s corporation tax liability of the current period.  Where the credit exceeds the corporation tax liability for the current year, the excess can be carried forward indefinitely to offset against future corporation tax liabilities or
  • Reduce the corporation tax liability of the previous year i.e. the company can make a claim for the excess to be carried back or offset against the preceding period’s corporation tax liability or
  • If unused, the credit can be refunded by the tax authorities subject to certain restrictions.  The only restriction in obtaining a cash refund is that the R&D credit refund cannot exceed the PAYE/PRSI remitted by the company to Revenue in the last two years or the corporation tax liability for the prior ten years if higher.

The claim must be made within one year of the end of the accounting period in which the expenditure has been incurred.

 

Broadly,

It can alternatively be used as a key employee reward mechanism to remunerate R&D staff effectively, tax free subject to certain conditions.  The effective income tax rate for such key employees may be reduced to a minimum of 23%, provided certain conditions are met by the company and the individual.

 

 

TAXATION OF COMPENSATION AND DAMAGES

Over the years I’ve been asked many times how court settlements should be taxed.  I’m still surprised by the number of people who are under the impression that a special tax for compensation and damages exists – it doesn’t.

In order to determine the correct tax treatment of damages and compensation it is essential to establish what the payment relates to.

There are several possibilities, the main ones being:

  1. Personal Injury
  2. Compensation for Revenue Loss
  3. Compensation for Capital Loss

 

 1. Personal Injury Compensation

A total exemption from Income Tax and Capital Gains Tax may be available in the case of personal injury compensation payments and income arising from investments of such compensation payments provided the following conditions, as outlined in Revenue’s IT 13, are satisfied:

  1. The compensation must be for personal injury.
  2. It must have been received arising from the institution of a civil action for damages in the court (where such an action is initiated but settled out of court, the compensation will still qualify) or pursuant to the issue of an order to pay under Section 38 of the Personal Injuries Assessment Board Act 2003.
  3. Payments awarded by the Criminal Injuries Compensation Tribunal also qualify.
  4. The person receiving the compensation, must, as a result of the injury, be permanently and totally incapacitated, either physically or mentally, from maintaining himself/herself.
  5. The income obtained from the investment of the compensation must be the individual’s sole/main income.

 

2. Compensation for Revenue Loss

If the compensation is for loss of earnings then the payment will be liable to Income Tax in the case of individuals and partnerships and Corporation Tax for companies.

Examples of compensation liable to Income Tax are as follows:

  1. Compensation under an insurance policy for the destruction of trading stock, accidents to members of staff or loss of profits.
  2. Losses arising as a result of a breach of contract, etc.

 

 3. Compensation for Capital Losses

The main examples under this heading are as follows:

  1. Compensation for damage or loss of an asset including land, buildings, plant, machinery, etc.
  2. Insurance payments as a result of loss, damage, depreciation or destruction of an asset.
  3. Compensation for the surrender or forfeiture of rights.
  4. Compensation for the exploitation or use of an asset.

These capital sums will be liable to Capital Gains Tax and treated as if there was a disposal of the asset.

 

INTERESTING STORY

I recently came across this situation:

  • An individual aged in his sixties received a considerable payment through the Irish courts.
  • It was held to be compensation as a result of a satisfactory settlement of a case for breach of a joint venture agreement.
  • The settlement was deemed to be compensation of a capital nature and therefore liable to taxation under the Capital Gains Tax legislation.
  • The reason it was to be taxed in this manner was because the payment represented damages for breaching a joint venture agreement which related to the entire structure of the company’s profit making apparatus as in Van den Berghs Ltd. v Clark (1935) 19 TC 390.
  • The individual had been a director of a family company with a shareholding of 30% who retired from the company some years earlier and had disposed of his full shareholding to the other directors.
  • When he sold his shares, the entire proceeds were exempt from Capital Gains Tax under Section 598 of the Taxes Consolidation Act 1997.
  • The reason he was exempt from Capital Gains Tax on the proceeds of the sale of his shares was because he qualified for “Retirement Relief.”
  • To be eligible for Retirement Relief the following conditions must be met: (a) The individual must be over 55 years, (b) He/She must have been a Director for at least ten years prior to the date of the disposal, (c) He/she must have been a full time working Director for at least five of those last ten years years, (d) He/She  must have held “qualifying” shares (i.e. he/she must have owned shares in the company for more than ten years, (e) it must have been a family company (the individual must have held at least 25% of the voting rights or at least 10% of the voting rights with not less than 75% being controlled by family members), (f) it must have been a trading, farming or holding company of a trading group and (g) the proceeds relating to the qualifying assets must not have exceeded €750,000.
  • The compensation payment received by the individual was also deemed to qualify for Retirement Relief under Section 598.
  • Why?
  • At the time the individual disposed of his 30% shareholding to the other directors of the family company, the price he received was well below market value.
  • The individual accepted this consideration, which was well below the threshold amount of €750,000, on the written agreement that if the company was successful in their claim for damages for breach of a joint venture agreement, that he would receive 30% of the compensation.
  • It held that the individual’s 30% share of the compensation awarded was eligible for Retirement Relief (since he met all the conditions of Section 598 TCA 1997) as it related to the disposal of “qualifying assets,” being his 30% shareholding, some years earlier.