Ireland – Determination of Employment vs Self-Employment Status: Updated Guidance

Why this matters

Determining whether an individual should be treated as “employed” or “self-employed” for Irish tax purposes is a challenge for many businesses.  There are several factors to consider in making that determination and the circumstances are not always straightforward.  Where misclassification arises, and Irish Revenue identifies that misclassification, the business is generally required to settle the payroll withholding (PAYE) liability due on payments made plus interest and penalties.  Whether or not these liabilities can be recovered from the individual will depend upon the contractual arrangements in place between the parties. 

KPMG Insights

The Supreme Court considered the assessment of employment status and established the five-step process solely from a tax perspective.  While employment law and social security (PRSI) provisions may need to be considered separately, Irish Revenue issued a further update³ to note that it will be working with colleagues in the Department of Social Protection and the Workplace Relations Commission to update the Joint Code of Practice relating to employment status.  This would suggest that all parties involved in employment status assessment may look to adopt a similar and consistent approach.

KPMG Insights

Following the Steps and Intervening Circumstances

In general, where any of the first three steps in the five-step process results in a negative answer, the end-user should not need to consider employment tax risk further and the individual should be treated as self-employed.  If the first three steps are all positive, the additional steps need to be considered in order to finalise the analysis.  All analysis should be documented.  When reviewing the position, businesses need to consider not just the contractual terms but also the actual working relationship and underlying substance of the arrangement.

Also, where services are provided through a corporate entity by an individual, these are not generally viewed as being provided personally and therefore not within Step 2.  There are two main exceptions to this:

a. Where the services of a statutory director of an Irish incorporated company are provided through a corporate entity, payments made in respect of such services remain an Irish PAYE matter for the payer.

b. Where an employee of a non-Irish corporate entity performs duties in Ireland (whether a group employee or not), his/her earnings can be secondarily liable to Irish PAYE withholding by the end-user unless the employee is not Irish resident and performs merely incidental duties in Ireland.  The level of merely incidental duties that can be performed before a secondary PAYE withholding and/or reporting obligation arises depends upon whether the employee resides in a country with which Ireland has a tax treaty and if the conditions for a tax treaty exemption on employment income is available.

Things to Consider, Next Steps

There can be significant complexity involved in analysing contractor arrangements especially where the relationship has been in place for a number of years or has evolved over time.  Specialist advice should be sought especially in non-routine cases.

Irish Revenue is encouraging all businesses that engage individuals on a self-employed basis to familiarise themselves with the tax judgment and review their workforce model.  Further they are encouraging businesses to make voluntary payroll settlements in light of of that review, where needed.

We are seeing a significant number of Level 1 and Level 2 PAYE compliance interventions issued to businesses in the last few weeks with a particular focus on contractor arrangements, resulting in prompted payroll disclosures for misclassified workers in some cases.

As there are reduced penalties available to businesses in making qualifying unprompted disclosures, we would recommend that all businesses actively review their current contractor profile with particular focus on: 

• identifying cases at risk of employment reclassification;
• payments made to a corporate entity for directors’ services which have not been captured in the PAYE system, and
• employees of foreign companies (whether group employees or not) working in Ireland for the benefit of the end-user and for whom a secondary PAYE obligation could arise.

Further, as the payroll settlement lies with the end-user in the first instance, it is also an opportunity to consider the manner in which contractors are engaged by the business including relevant contractual terms and applicable tax indemnities.