Tech contractors are this week anxiously reviewing their contract and tax arrangements following last Friday’s news of a looming Revenue crackdown on the sector.
They and their advisors will be grappling with a range of complex issues, some of which contradict each other.
An interesting contradiction lies at the heart of a major issue flagged by Revenue last week, as follows:
“For the moment, our concern is that in many cases too small a proportion of the gross contract payment is reported as liable to tax in the hands of the contractor. Into the future, this will continue to be the subject of frequent checking, and will be a factor in risk-based selection for audit.”
Essentially Revenue are stating here that, if your contracting business has significant overheads, they will suspect you of evading tax.
This seems to directly contradict Revenue’s own Code of Practice for Determining Employment or Self-Employment, which lists the various factors that indicate whether a worker is an employee or a contractor running their own business.
Among the criteria that suggest that they are self-employed, are that the worker:
- “Provides the materials for the job.
- Provides equipment and machinery necessary for the job, other than the small tools of the trade or equipment which in an overall context would not be an indicator of a person in business on their own account.
- Has a fixed place of business where materials, equipment etc. can be stored.
- Provides his or her own insurance cover e.g. public liability cover, etc.”
Now, if a contractor provides all these component functions in the course of their contract work, these will all cost money, ie overhead costs. These costs represent the difference between the contractor’s gross turnover and their net profits.
For a contractor who provides their own materials, equipment and insurance, and runs their own business premises, these overhead costs may be significant. Yet Revenue’s letter now tells contractors that if their companies have such large overheads, they will be treated as suspected tax dodgers!
It looks like Revenue are presenting contractors with a classic Catch-22: Unless you incur overheads, you’re not a contractor at all. And if you incur overheads, you’re a suspected tax dodger.
As Bart Simpson once said:
“Life is a paradox, You’re damned if ya’ do, and you’re damned if ya’ don’t.“