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Revenue Guidance Note on Determining Employment Status for Taxation Purposes

The Revenue Commissioners has recently released new guidance outlining the factors for determining employment status for tax purposes. Although this guidance is primarily focused on tax law and practice, it is also pertinent for establishing individuals’ status in terms of employment and social welfare.

Businesses that hire self-employed contractors, consultants, and freelancers should now reassess their commercial arrangements to confirm they meet the criteria for valid self-employment concerning tax and employment laws.

A worker’s employment status for taxation purposes is not a matter of choice – it depends on the terms and conditions of the role and whether the practical working arrangements between the business and the worker are consistent with the express categorisation of the contract. While it is usually clear whether an individual is employed or self-employed, it may not always be obvious.

Businesses who engage workers now have a clear decision-making model to determine the employment status of each worker for taxation purposes. It is essential that businesses urgently and comprehensively review arrangements with all workers and determine their employment status for taxation purposes. It is clear that there are a number of workers across a number of sectors who will need to be treated as employees for tax purposes, where previously they have been treated as self-employed. For those re-classified as employees for tax purposes, the business will have an obligation to operate PAYE.

While Revenue has responsibility for determination of employment status of a worker for taxation purposes, responsibility for determination of employment status of a worker for PRSI purposes falls to the Department of Social Protection (DSP).

Responsibility for a range of employment rights, such as employment equality, minimum wage rates, holiday pay, sick pay, maternal and paternal leave, sectoral pay agreements, etc., falls to the Workplace Relations Commission (WRC).

The Revenue Guidelines for Determining Employment Status for Taxation Purposes highlights that each State body operates within its own legislative framework and a decision by one body is non-binding on the other two bodies. While Revenue endeavours to ensure consistency, occasionally, due to the separate legislative frameworks, differences arise. As a result, it cannot be assumed that the decision of one State body will be replicated by either or both of the other two.

Revenue is currently working with the DSP and the WRC to update the Code of Practice on Determining Employment Status.

Revenue’s Five Step Decision Making Framework

The decision-making framework provided by Revenue consists of five questions as follows:

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

2. Has the worker agreed to provide the services personally or can they provide a substitute?

3. Control – what level of freedom does the worker have to determine how the work is done?

4. Factual Matrix – If Questions 1 to 3 are satisfied, the decision maker must then examine all aspects of the work arrangement to decide if it resembles an employment contract.

5. Legislative Regime – Finally, the decision maker should consider any laws that might affect the classification as part of the framework above, especially those protecting particular employee rights.

Next Steps

Employers will be expected to provide evidence of the relevant analysis done to apply the five-step framework when a worker is engaged, including, where appropriate, looking beyond the simple wording of the contract between the business and the worker.

The Revenue Guidelines also note that as relationships between businesses and individuals can change over time, employers should regularly review any relevant arrangements to ensure that the application of the framework at that later point in time would not result in a different determination.

If you have any queries in relation to this topic, please contact us at info@voltedge.ie or call at 01 525 2914.

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