Motor Expenses and Subsistence for contractors (Computer consultants, engineers, etc)
The Revenue have a special project running at the moment which is
looking at the tax compliance of contractors who use company structures
to provide their labour only services to mainly one customer. Examples
of this may be computer consultants or engineers who provide services to
bigger firms. rather than been hired as
employees they are hired as subcontractors and put in place a company
to provide the services. This is a perfectly legtimate structure to have
in place. However the Revenue has decided that they are not willing to
allow motor expenses from the home to the place of work as been
deductible for tax purposes and also alot of subcontractors would have
claimed subsistence and the revenue is also not allowing this (dependent
on the individual case). This is based on the basic maxim that all
costs must be wholly and exclusively for the business in order to be
claimable for tax purposes.
They are been reasonable with people
who come forward to amend previous returns and pay any outstanding tax.
If you are in this situation you can ring me on 0469293891 to discuss
what you need to do.
Revenue’s Contractors Project
Background
Revenue’s National Contractors Project is aimed at addressing very
specific problems that emerged through audit activity. A succession of
tax audits had revealed that individuals were providing their services
to clients ("end-users") via intermediaries - often, but not
exclusively, personal service companies. The intermediary treats the
individual as an employee and operates PAYE on the remuneration which it
pays to the individual. An assumption underlying these arrangements is
that the individual is not an employee of the end-user. While this may
be true in the generality of cases, the facts will determine whether or
not there is an implied contract of employment between the individual
and the end-user.
The tax audits have revealed that in some instances the use of
intermediaries has resulted in evasion, which arose when intermediaries
paid tax-free "expenses" in circumstances where the expenditure had not
actually been incurred. In other circumstances, the expenses had no
relation to the business. It was clear that some contractors were using
the device of an intermediary company (which they usually owned or
controlled) to contend that they are compliant PAYE taxpayers, while
actually extracting a large part of the company’s contract income from
the company free of tax in circumstances where such income should have
been taxed. In some of the worst cases encountered, up to 70% of income
was extracted in this manner.
While the project was intended to be narrowly focused, there are
many different circumstances arising, which give rise to requests for
clarification. The purpose of this article is to address the
treatment of expenses and the procedures which Revenue is adopting for this project.
Revenue’s Approach
Revenue’s Contractors Project is designed to deal quickly and
cleanly with the particular problem. Contractors whose accounts show
unusually high proportions of expenses are being identified for
compliance intervention.
To facilitate
disclosure, we adopted the
practice of providing assistance to those who were experiencing
difficulty, and where a genuine effort is being made, we accept
amendment of disclosures following discussion. At the same time, tax
agents have been invited through their professional organisations to
encourage their clients to consider whether they should make an
unprompted qualifying disclosure.
We are also ready to discuss
methods of paying
the disclosed amounts where there is an inability to pay in one sum.
Within the disclosure itself, we undertook to accept disclosures that
dealt with the four specified years provided the resulting level of
expenses was within industry norms, and provided we had no specific
knowledge that the declaration was likely to be false. This is a
considerable concession, because Revenue routinely checks disclosures in
some detail. Finally, for the purposes of this project we advised that
Revenue would not seek to "re-gross" expenses in calculating the tax
underpayment. We have adopted this approach on the understanding that
the parties concerned will comply strictly with the law in future. In
the event of a future re-audit discovering this not to be the case, then
Revenue will not feel bound by the approach adopted to date in relation
to re-grossing, and future tax underpayments, and associated interest
and penalties will be pursued.
Treatment of expenses of travel and subsistence where the
services of an individual are provided through an intermediary to an
end-user
The publicity attracted by the National Contractors Project has
caused some questions to be raised about the application of tax rules,
and has led to requests for general rulings from Revenue about
hypothetical cases in a wide variety of situations.
The basic legal provisions are in the Taxes Consolidation Act,
which provides in Section 81 that a business may not deduct expenses
that are not "wholly and exclusively" incurred for business purposes.
Section 117 provides that sums paid as expenses are assessable as
emoluments of the office or employment, while Section 114 provides for a
deduction in respect of expenses which an employee or office-holder is
necessarily obliged to incur in travelling in the performance of the
duties of the office or employment or other expenses wholly, exclusively
and necessarily incurred in the performance of the duties of the office
or employment.
The Act does not make specific provision for the payment of
tax-free expenses. However, to avoid the operation of PAYE on expenses
which would then lead to repayment claims on foot of deductions due
under Section 114, Revenue has long accepted that expenses which meet
certain conditions may be reimbursed tax free in certain circumstances.
Revenue has given detailed guidance on the circumstances in which
tax-free reimbursement of expenses may be made in its
Statement of Practice SP/IT/2/2007 (PDF, 157KB), in information leaflets
IT51 and
IT54, and in this year’s
Tax Briefing 3 of 2013, all available at:
www.revenue.ie.
The guidance given in Tax Briefing 3 of 2013, entitled
"Reimbursement of Travel and Subsistence Expenses by Intermediaries",
clarifies the Revenue position on the circumstances in which expenses of
travel and subsistence may be reimbursed free of tax
where the services of an individual are provided through an intermediary to an end-user,
generally at the premises of the end-user. Services provided through an
intermediary include services provided through a personal service
company, a managed service company or an agency.
The key characteristic of the arrangements which are the subject
of Tax Briefing 3 of 2013 is that the end-user is acquiring the services
of a specific individual who will work under the general direction and
control of the end-user. In some instances, the contract between the
end-user and the intermediary will be explicit in identifying the
individual whose services are being acquired by the end-user. In others,
it will be apparent from the nature of the services, the manner in
which they are provided and the conduct of the parties, that what is
being provided is the services of a specific individual.
The main point which Tax Briefing 3 of 2013 sought to clarify is
that, in applying previous Revenue guidance to the arrangements referred
to in the Tax Briefing,
home cannot be treated as a "normal place of work".
Revenue does not accept that the fact that administrative work is
carried out at home, or that home is the registered office of the
intermediary alters this position. It follows that the cost of travel to
and from home
may not be reimbursed free of tax. As
Tax Briefing 3 of 2013 points out, in most instances, the end-user
premises is the normal place of work and expenses of travel and
subsistence may be reimbursed free of tax in respect of necessary
business absences from this normal place of work.
In referring to the "normal place of work", Tax Briefing 3 of
2013 was picking up the terminology of previous Revenue guidance. At the
same time, it is important to bear in mind that "normal place of work"
is not mentioned at all in statute.
The true test of whether the
cost of travel is allowable for Schedule E purposes is whether the
journey was necessarily incurred in the performance of the duties of the
office or employment. This is a test which has repeatedly been recognised in various judicial pronouncements as narrow and hard to meet.
Some of the scenarios in the examples in Tax Briefing 3 of 2013
would be rather unusual in the context of an intermediary which provides
the services of an individual to an end-user. Nevertheless, they are
intended to bring out the circumstances in which Revenue will accept
that the cost of travel and subsistence may be paid tax free to an
individual whose services are being provided via an intermediary.
Applying the foregoing test to the scenarios in Tax Briefing 3 of
2013, Revenue’s view is that a journey from the person’s home to a job
is not a journey necessarily undertaken in the performance of the duties
of the employment. The person is simply travelling from home. The
length and cost of the journey is not imposed by the office or
employment but is dictated by the choice of place of residence of the
individual concerned. Similarly, an individual whose services are
provided via an intermediary and who incurs expenses in living away from
home cannot claim the cost of living away from home.
The fact that an intermediary may provide the individual’s
service under a series of short-term contracts does not alter the
position. Each location at which the individual provides services
becomes a "normal place of work" while the services are being provided
to that end-user. The expenses of travelling from home to each of these
locations or the expenses of living at those locations cannot be
reimbursed tax-free.
Treatment of Expenses of Travel and Subsistence in other Cases
The situations dealt with in Tax Briefing 3 of 2013 are to be
distinguished from situations where a company provides goods or
services, other than the services of a specific individual, to its
customers or clients. There is no change in Revenue’s interpretation or
application of the law in relation to such cases. Previous Revenue
published practice as set out in Revenue leaflets IT51 and IT54 and
Statement of Practice SP IT/02/2007 continues to apply.
Family Members as Employees
The question of whether any individual is an employee of an
intermediary company can only be determined in the light of the
particular facts. This applies equally to the engagement of family
members of directors. Revenue has found that, in some of the cases
examined in the course of the project, alleged employments of family
members were not bona-fide. Revenue will continue to examine such
arrangements to determine whether they have been put in place on an
arm’s length basis. This means that the family member must be performing
services or duties in the business and rates of pay must be similar to
the rates paid to other employees doing the same type of work. If the
pay is for technical work, the employee (payee) should have the skills,
qualifications and experience necessary to carry out that work and to
justify the rate of pay.
Penalties
As outlined in the
Code of Practice for Revenue Audit,
auditors will exercise care in considering whether penalties arise in
any particular case, and in considering the appropriate category of tax
default. Because of our experience with early cases encountered,
Revenue’s view is that the type of activity being targeted in this
project is in the deliberate behaviour category. Of course, the
circumstances of each case will inform the level of penalties being
proposed. The deliberate behaviour category is fully appropriate where
the claimed expenses are not incurred, or not incurred in connection
with the business. A lower penalty is appropriate where it is clear that
the practice at issue resulted from a reasonable interpretation of the
law or practice which turned out to be incorrect.
Where a taxpayer does not agree to the level of penalties being
proposed, Revenue may seek to have the penalty determined by a relevant
Court [Paragraph 4.5.3 of the Code of Practice contains more details].
Where the default is in the deliberate behaviour category,
and if a "Notification of a Revenue Audit" has not issued, the penalty level proposed is 10%. A taxpayer
who has received a "Notification of a Revenue Audit"
still has an opportunity to make a prompted qualifying disclosure, and
the penalty payable will be 50%, where the default is in the deliberate
behaviour category. Where any default is shown to be due to careless
behaviour or innocent error, much lesser penalties, if any, will apply.
Finally, those who have a liability to additional tax, due to deliberate
behaviour, and make no effort to make a disclosure (or make a false
disclosure) are liable to penalties ranging from 75% to 100%, and to
audit of several years if evidence of possible tax fraud is discovered.
In particularly serious situations, consideration will be given to
investigating with a view to prosecution.
Protocols in relation to the making of Disclosures
All matters in relation to qualifying disclosures are dealt with
in accordance with legislation and the Code of Practice for Revenue
Audit.
Who is being Audited?
In general the focus of the audit will be on the intermediary
company and the individual. It may be necessary in some cases to extend
the scope of the intervention to other directors to verify particular
aspects of the matters under review. All taxpayers who are to be audited
will receive a "Notification of a Revenue Audit".
How many years are being Audited?
In order to deal quickly with the problems identified Revenue
decided not to launch an open-ended audit programme, but instead to
focus on just four years – 2008 to 2011 - and to encourage tax agents to
advise their contractor clients to review those years and make
disclosures where appropriate.
Previously Audited
The fact that a case was previously audited [Comprehensive or
PAYE (Employers)] and the matter of the tax-free reimbursement of
expenses was not raised does not preclude Revenue from raising the
matter in the course of an audit under the Contractors Project. The fact
that deliberate default was not discovered on an earlier audit does not
mean that Revenue has approved or excused the default. Where the
treatment of expenses was specifically raised during an earlier audit,
Revenue will consider accepting any subsequent adjustment as a
Technical Adjustment,
without penalty. For a technical adjustment not to attract a penalty,
the auditor must be satisfied that due care has been taken by the
taxpayer and that the treatment concerned was based on a mistaken
interpretation of the law or practice, and did not involve deliberate
behaviour. However, an exception to this treatment might be where the
level of expenses which should have been taxed increased substantially
in years subsequent to the audit.
Inability to Pay
Claims to Inability to Pay are dealt with in accordance with Paragraph 4.9 of the Code of Practice.
No Liability
Many individuals are satisfied that they have no need to make a
disclosure because their affairs are in order. While we do our best not
to trouble such people, some may receive audit notices, normally where
the expenses appear high for the business in question. In that case, it
will save a great deal of trouble if the contractor writes to Revenue
stating why he/she believes there is no outstanding liability, and
briefly explaining why the nature of the actual business generates
unusually high expenses.
Review/Complaint
For those who feel they have been unfairly treated, the
procedures for seeking a review are set out on Revenue’s website:
www.revenue.ie
Progress to Date
Well over a thousand audit letters have been issued by Revenue,
and the response has generally been engagement by the contractor to
discuss the making of a disclosure (Revenue officials offer advice if
required), or to explain why they have no need to do so. There is also a
steady flow of disclosures from those who have not yet been selected
for intervention. The small group who have decided not to engage have
entered the audit process.
Revenue has met with companies, tax agents and representatives of
both contractors and recruitment agencies to discuss the project, and
to allay some ungrounded fears about Revenue’s intentions. Revenue has
not changed its interpretation of tax law. It is focussed on dealing
with tax evasion which, if left unchecked, will result in unfairness to
other compliant taxpayers and a loss to the Exchequer.
The national project has identified a very wide range of
structures and practices being used by contractors, and it has become
clear that this project (or a successor) may need to continue for some
time, to deal with issues specific to subsets of the contracting sector,
and with connected issues.
