Revenue Once Again Turn Screw on Contractors

April 7, 2014

The seemingly interminable Revenue Contractors Tax Project took another twist today with the issue of a fresh letter from Revenue South West Region to the Irish Tax Institute.

Revenue are now promising a speedy resolution to their audits of “some 550” contractor companies, whose tax position has not yet been resolved.  These form part of an ongoing project to claw back travel expenses and other tax deductions claimed by such companies.

The letter concedes that from Revenue’s viewpoint, “progress has been disappointing in the first Quarter of 2014” and complains of “widespread evidence of delay and reluctance to agree settlement”.

Revenue Contractors Tax Project

Presumably, this is a reference to the increasing numbers of contractors who are opting t0 formally challenge Revenue assessments with the Appeal Commissioners.

Revenue now state that:

  • Where taxpayers have made submissions that have not yet been processed by Revenue, responses will now “issue as a matter of urgency”.
  • Enquiries where “there is no evidence of significant liability” will be closed.
  • In cases where a liability has been determined, but no settlement has been made, the taxpayers concerned will be notified of Revenue’s intention to raise assessments within a further 10 days.
  • Where taxpayers have failed to reply to Revenue information requests, Revenue will raise assessments based on disallowing all expenses claimed.
  • Where taxpayers previously filed a “Notice of Intention” to make a disclosure, but haven’t subsequently done so, Revenue will withdraw the concessions “set out in (our) letter of January 2013 within 20 days.
  • Ongoing audits which started after 1 January 2014 will progress normally.
  • Taxpayers who cite inability to pay liabilities must first agree their liabilities before any discussion can take place on how they can pay the settlement amounts.

Ironically, today’s letter was unveiled only hours after the UK House of Lords slammed the ongoing campaign by Revenue’s counterparts in the UK, HMRC,  to disallow tax benefits accruing to “personal service companies” through the controversial IR35 legislation in that jurisdiction.

It’s worth noting that no equivalent legislation applies in Ireland and the entire Revenue campaign here has been based, not on the laws of the land, but on Revenue’s own interpretation of the law.

Based on the UK experience, there is no guarantee whatsoever that the Revenue stance will withstand a future challenge in the courts.

If you have concerns about your own position, you should review the implications of the current Revenue contractors project with your accountant or tax advisor, and if necessary, seek independent professional advice, as soon as possible.

The Irish Tax Institute have published the Revenue letter in pdf format here. Otherwise you may access it on this blog, here.


Revenue’s latest letter to Contractors – In Full

April 7, 2014

The following is a transcript of Revenue’s letter of 3 April to the Irish Tax Institute in relation to their ongoing Contractors Project, challenging travel expenses and other overhead cost  claims by owner-managed contractor companies.  The original is here. See also my commentary.

Revenue

 

 

“Office of the Revenue Commissioners

South West Region

Revenue House

Blackpool

Cork, Ireland

 

Cora O’Brien

Irish Taxation Institute

South Block

Longboat Quay

Grand Canal Harbour

Dublin 2

3 April 2014

 

Re: Revenue Contractors Project

Dear Cora

I wish to brief you on developments in the contractors project, which will be of interest to ITI members.

We have reviewed progress on the audits remaining open in Phase I of the project, which relate to some 550 cases. At the outset, it was our intention to progress cases quickly. In the event, there have been delays, largely arising from the focus on travel and subsistence expenses which became central to the project. Requests for clarification of the rules applying to such expenses delayed progress and resulted in the issue of Tax Briefings 3 and 4 of 2013 and in some correspondence and meetings. All general issues of clarification and interpretation were dealt with by the end of 2013, so there is no longer any justifiable reason for delay. Accordingly, it is now appropriate to move towards conclusion of this phase of the project.

It is our intention to conclude Phase I of the project by July 2014. Notwithstanding the extensive clarifications given by Revenue, progress has been disappointing in the first Quarter of 2014, and there is widespread evidence of delay and reluctance to agree settlement on the part of many taxpayers. The project team has therefore been asked to review all open cases, and to proceed as follows:-

  • Where there is material on hands awaiting a Revenue response, responses will issue as a matter of urgency.
  • Cases where there is no evidence of significant liability will be closed.
  • Cases that received an audit notice before 31 December 2013 —

o        where all material issues have been decided but without settlement will be notified of our intention to raise assessments within 10 working days of the issue of the notice in the absence of agreement;

o        where there has been no response to the initial request for information will be notified of intention to raise assessments based on disallowance of all expenses claimed;

o        where intention to make a disclosure was indicated but no qualifying disclosure has yet been made will be notified that the concessions set out in my letter of January 2013 will be withdrawn 20 working days from the issue of the notice, after which full Code of Practice terms will apply.

  • Cases that received an audit letter since 1 January 2014 will be progressed normally, within the terms of the project.

It appears that some taxpayers may be reluctant to agree a settlement due to fear of inability to pay the agreed liability. I would like to emphasise that no discussion on ability to pay can take place until the liability is settled. We remain open however to discussion of timing and methods of payment to ensure there is no undue hardship. In that regard, the Collector-General’s procedures for dealing with difficulty in payment will apply, including verification of inability to pay, and instalment arrangements in appropriate circumstances. Guidelines can be viewed at http://www.revenue.ie under the link “Tax Payment Difficulties”.

Each case will be considered separately. Taxpayers are of course entitled to adequate time in which to respond to Revenue queries, and the letters described above will issue only where the caseworker is satisfied that there is no good reason for the delay experienced. Every effort will be made to arrive at an agreed settlement, but it is unfortunately clear at this stage that there is widespread delay, and this cannot be tolerated indefinitely. Assessments will be raised where necessary, and interest and penalty will apply as appropriate.

Yours Sincerely

 

Anthony Buckley

Assistant Secretary”

If you have concerns about your own position, you should review the implications of the current Revenue contractors project with your accountant or tax advisor, and if necessary, seek independent professional advice, as soon as possible.

 


Revenue Clarify Queries on Contractors Project

March 14, 2014

The ongoing Revenue Contractors Project rumbles on with today’s publication of a Revenue letter to the Irish Tax Institute which seeks to clarify a number of queries surrounding contractors who operate as limited companies, and what expense deductions they can claim against taxable income.

The Irish Tax Institute previously asked Revenue for guidelines on how individual contractors should be treated:

  • as genuine businesses, with full expense deduction entitlements; or
  • as de-facto employees with much more limited expense deductions,

in view of Revenue’s previous guidance on this topic last November.

Revenue Contractors Tax ProjectRevenue have now listed the following indicators in order to address this question:

  • does the contractor company  has an establishment (i.e. premises, employees, business) which will remain in place beyond the conclusion of an individual contract, ie if the current contract ceases, will the company retain a market to service?
  • was the contract obtained via a service procurement process, or by recruitment of an individual with specified skills/characteristics?
  • is the contract is defined by the completion of a project or task, or defined by period (including open-ended or renewable contracts).

In addition the arrangements behind every contract will determine Revenue’s position, including “working arrangements, reporting/supervision, length spent with one client, actual employment experience, and other arrangements”.

Based on the above, Revenue conclude that “a majority of professionals working in the Irish market are outside the scope” of the current restriction on expense deductions, “…because they are in business, offering a professional service on the open market.”

They go on to say that some professionals may have a combination of contracts, some of whom are open market business contracts, and others de-facto employments. They state that expenses connected with business contracts are allowable, but those relating to de-facto employments are not allowable.

The letter repeats Revenue’s contention that a company director or employee “without a fixed base” cannot claim an expense deduction for travelling to a job.

It also addresses the issue of “country money”, a concessional tax-free expenses arrangement for construction and electrical workers. It stresses that “country money” relates only to temporary assignments away from their employers’ base, and points out that Revenue are happy that contractor worker/directors are,  in similar situations, eligible for the more generous civil-service expenses rates.

Commentary

Today’s Revenue letter seeks to clarify much of the uncertainty surrounding their contractors project. However it is only partly successful in doing so.

It is welcome that they have now confirmed that “a majority of professionals working in the Irish market are outside the scope” of the project. However the position of those remaining within its scope remains as uncertain as ever.

In particular the fresh criteria have listed today remain quite vague and are capable of being interpreted in different ways.

For example the requirement that contractor company should have a premises, employees and/or business, that will remain after the current contract ends, is in many ways a  statement of the obvious – that almost all limited companies that fulfill a contract to completion have the capability to win another contract – either with the same customer or with another.

The issue of how a contractor company has sourced their contracts – eg via a service procurement project or by recruitment of an individual- is rather nebulous.

It is often said that people don’t do business with companies, but they do business with the people behind those companies, be it the owner of the company or more commonly its frontline staff.

Where for example, an owner-operated contractor company wins a contract, it is almost always because of the personal credentials of the company promoter than because of the corporate image or record of the company itself.

The same uncertainly persists with Revenue’s differentiation between project- or task-centred contracts or period-based open-ended or renewable contracts.

The fact that a contract has a fixed duration often has limited or no relevance to the nature of the services provided. An ongoing contract can cover work on many different projects and tasks, or can refer solely to a single project or task.

In addition, long-term or ongoing project contracts will often specify a fixed duration so that the contractor and customer can jointly negotiate revised terms based on changing costs and specifications at various intervals.

This all means that the ongoing uncertainty regarding Revenue contractors project is set to continue for the foreseeable future – with more and more cases ultimately being decided at the Appeal Commissioners, or in the Courts.

If you have concerns about your own position, you should review the implications  of the current Revenue contractors project with your accountant or tax advisor, and if necessary, seek independent professional advice, as soon as possible.

The Irish Tax Institute have published the Revenue letter in pdf format here. Otherwise you may access it on this blog, here.

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Revenue’s Latest Letter on Contractors Project

March 14, 2014

The following is a copy of Revenue’s letter of 10 March last to the Irish Tax Institute in relation to queries they raised on their ongoing Contractors Project.

Revenue

“ITI Queries on Revenue letter of 27 November 2013

Query 1. We would like to have some sense of how Revenue will determine whether a taxpayer falls within the remit of Tax Briefing No.3 i.e. how Revenue will determine whether a taxpayer is supplying the services of an individual under the end-user’s control, rather than otherwise supplying services. Is this based on a review of the contract terms, working arrangements etc?

Revenue Response: Unfortunately, as the question implies, there is no short answer that will cover every case. There are several indicators however, which enable classification of most cases. •

  • The first question is whether the company in question has an establishment (i.e. premises, employees, business) beyond the conclusion of contracts for an individual contractor. This would establish that the company is in the business of providing a service to the market generally.
  • The next issue is how the contract was obtained – was it through a procurement process aimed at securing a defined service, or was it recruitment of an individual with specified skills/characteristics? •
  • The terms of the contract will show whether it is a contract defined by completion of a project or task, or defined by period, or openended/ renewable. •
  • Where the position is unclear, the actual arrangements will determine our view, and working arrangements, reporting/supervision, length spent with one client, actual employment experience, and other arrangements would be considered.

Consideration of the foregoing will lead to the conclusion that a majority of professionals working in the Irish market are outside the scope of tax briefing 3 and 4 of 2013 in relation to their travel and subsistence expenses, because they are in business, offering a professional service on the open market. It is also the case that a company may have a combination of contracts, some obtained through normal service procurement, and others that constitute provision of an individual’s services. In such situations, expenses arising in the business are treated as such, while travel connected with the individual’s contract must be treated as set out in Tax Briefings 3 & 4.

Query 2. On a related point, in “case 2” on page 7 of your letter you note that the contractor is clearly not within the category to which the Briefing applies – is this because of the number of contracts he has, or because of other factors?  

Revenue Response: The number of contracts certainly indicates that the contractor is operating as a business, seeking and accepting contracts for project management service wherever the opportunity arises. The product consultancy service he provides is a professional service, similar to the giving of legal or accountancy advice. Finally, he is working to complete delivery of a service, not under the direction of the client. Overall, this is a business, and expenses incurred in conducting the business are allowable for tax purposes.

Query 3. There is a reference on page 5 of the letter to “…the well accepted view” that if an employee has no fixed base then he/she cannot claim a deduction for travelling expenses under Section 114. Our members are unclear as to where this view comes from.

Revenue Response: There is a slight misquotation in the query. My letter refers to the expenses of travelling to a job. If an employee has a fixed base, and is required to attend for work at some other location, then expenses may be reimbursed, calculated on distance from home or fixed base, whichever is less. If however there is no fixed base the expense of getting to work is the cost of commuting, for which no deduction is allowed.

Query 4. In relation to “country money”, the letter notes that country money applies to employees and not to contractors. Members have queried why country money is not available when Revenue are treating those who fall within the Tax Briefing as defacto employees i.e. “working under the general direction and control of the enduser”.

Revenue Response: We have pointed out several times that we are not, in this project, addressing the issue of whether some contractors should be regarded as employees. The application of “country money” is a concession made to deal with specific features of employment in the construction and electrical industries. In practical effect, it deviates very little from the regime described in Tax Briefings 3 & 4, since tax-free expenses are not paid where travel is to or from the employer’s headquarters or the site for which the employee was recruited. Expenses are tax-free only where the  employee is required to attend for work at other sites, all more than 32km from employer’s headquarters. The rate of payment of country money is then set to eliminate the need for detailed computation. In the case of a contractor required to attend temporarily at a site other than the contract site, expenses are similarly payable tax-free, and are not confined to the country money rates.

Tony Buckley 10 March 2014″


Contractor Appeals Hit Revenue Tax Project

January 20, 2014

The Sunday Business Post yesterday reported that the Revenue’s ongoing National Contractors Project has run into problems, as increasing numbers of contractors formally challenge Revenue assessments raised against them.

The Revenue investigation was launched last year in response to alleged tax evasion on the part of contractors and professionals working through their own companies in the technology, software and pharmaceutical industries. It started last January in the Munster region and was extended nationwide in Spring 2013.

Appeal Commissioners Revenue Contractors Tax Project

Revenue audits had revealed that some contractor companies were claiming excessive expenses against their tax bills, with claims for motor & travel and associated home office costs in the spotlight.

Revenue then “invited” contractors to make voluntary disclosures of their tax underpayments, including interest and penalties.  A significant number of contractors came forward to do so and it was once speculated that the entire project could yield up to €100m for Revenue.

However Business Editor Ian Kehoe has now revealed that a number of contractors have faced down Revenue, maintaining that their tax affairs and accounts deduction claims are fully in order.

In addition, Dun Laoghaire-based tax consultant Dermot Byrne recounted in yesterday’s paper the case of one contractor who demanded that Revenue raise a tax assessment, in order to enable him to formally challenge the assessment through the Appeal Commissioners, in line with the Revenue Code of Practice for Revenue Audit.  Revenue then backed down and dropped their case against the contractor and his company.

The lesson for contractors is clear: if you feel aggrieved with Revenue’s treatment of you and your business, you can challenge them at the Appeal Commissioners.

It goes without saying that Appeals are only advisable with the benefit of professional advice. Bear in mind the old saying “A man who is his own lawyer has a fool for a client“. But, if you don’t look after and protect your own interests, who will?

Ian Kehoe’s & Dermot Byrne’s articles yesterday can be accessed by purchasing a Sunday Business Post subscription, starting at €2.69 for a single edition.


Irish Tax Institute Query Home Office Tax Crackdown

August 16, 2013

The Irish Tax Institute have today published their formal response to the last month’s Revenue Tax Briefing which sought to restrict allowable travel expenses for contractors and small companies operating from home office environments.

In their Tax Briefing, Revenue effectively attacked the entitlement of company directors and employees to claim mileage and subsistence expenses in respect of travel to and from their home office – even if it is a company’s registered office or main place of business.

Revenue Attack Home Office Company ExpensesThe Irish Tax Institute (ITI) have responded by questioning the validity of this approach.

They point out the rather obvious reality that in the modern working environment, there are many cases in which a person’s home is their main place of work, and note that Government policy actively encourages home working and teleworking.

The ITI criticise the Revenue position as failing “to take account of genuine situations where an individual’s work operations are based at their home and the majority of their work takes place at home, rather than at any other premises.”

The Institute also point out the apparent contradictions between the new Revenue policy and a range of existing Revenue arrangements and concessions, including:

  • construction industry “country money”,
  • allowable subsistence for foreign travel and,
  • the Budget 2012 Special Assignee Relief Programme and Foreign Earnings Deduction schemes.
Clearly this debate is far from over.

For more, see The Irish Tax Institute statement , Revenue Tax Briefing No 03/13 & my recent Blog Post on this subject.


Revenue Warning Letters to Issue to Tech Companies

June 17, 2013

Revenue are poised to issue tax warning letters to technology contractor companies by the end of June, in the latest phase of their ongoing investigation into the sector.

This is according to an update issued by Chartered Accountants Ireland to its members today.

Revenue Probe Tech Contractor Companies

The Revenue “Services Contractors Project” targets companies which provide contracting services to a larger company. Its main focus is on the level of expenses claimed against taxable income.

Revenue believe that at least some expense claims are excessive and have previously invited companies based in the South-West region (counties Cork, Limerick, Kerry and Clare) to review their tax returns and settle any underpayments along with interest and penalties.

If you have a liability, you can avail of lower penalties by completing an Unprompted Qualifying Disclosure and settling the liability.

However, you must do this before Revenue notify you of an impending audit. Once you are notified of an audit, this option is no longer available, and you are then restricted to completing a less attractive Prompted Qualifying Disclosure.

If  you feel this may affect you, you should review your situation immediately, preferably with your tax advisor. You should also consider getting independent professional advice – if only for your own peace of mind.

For more on the Revenue “Services Contractors Project”, see my previous blog posts on this topic.

For more on Qualifying Disclosures see the Revenue Code of Practice for Revenue Audit

Today’s Chartered Accountants Ireland update is here.