Revenue is preparing a crackdown on thousands of engineers and IT professionals after uncovering “deliberate understatement” of tax by those who have set up companies to trade as independent contractors but work for a single client.
The planned swoop, notified by revenue to tax advisers last week will concentrate initially on Cork, Limerick, Kerry and Clare, although a nationwide investigation is expected to follow.
The current move represents the first attempt to extend the PAYE net to a growing army of IT professionals who prefer the flexibility of working as independent contractors.
Revenue is offering reduced penalties to encourage voluntary disclosure of underpaid tax. Those who come clean are also being promised immunity from public naming and shaming as tax defaulters. If revenue suspects their disclosures are incomplete however, it will audit their companies’ accounts for at least the previous four years.
Revenue is concerned that contractors are reducing their tax bills by charging expenses such as travel and subsistence costs to their companies – deductions that could not be claimed if they were taxed as employees by the business for which they work.
Employees are not allowed claim tax deductions for the cost of travelling to their normal place of work, whereas contractors are claiming these reductions even when they spend most of their time working on-site at a client’s premises.
Below are the vital rules in relation to tax free reimbursement of motor and subsistence expenses which contractors should be aware of:
Where directors and employees necessarily incur expenses of travel and subsistence (relating to the travel) in the performance of the duties of their office or employment the reimbursement of such expenses may within certain limits be made tax free. The following conditions must be met:
- The director or employee must be temporarily away from their normal place of work in the performance of the duties of their office or employment.
- The travel expenses must be necessarily incurred in the performance of the duties of the office or employment.
- The expenses of subsistence must attach to travelling necessarily incurred in the performance of the duties of the office or employment.
If these conditions are not met any reimbursement of expenses is liable to PAYE/PRSI as if it was a payment of wages.
Sole traders cannot claim mileage and subsistence using the civil service rates but should instead keep receipts for the business portion of motor running expenses (fuel, motor tax, motor insurance), hotels and other business expenses incurred.
Normal place of work
The employer’s business premises will be regarded as the normal place of work for an employee where:
- travel is an integral part of the job involving daily appointments with customers; or
- the duties of the employment are performed at the various premises of the employer’s customers but substantive duties are also performed at the employer’s business premises.
If a director or an employee spends little or no time at their employer’s place of business and all their time, for example, on site, the Revenue Commissioners may argue that the normal place of business of the director is in fact the site and not the employer’s place of business. This would mean that the journeys from home to site are not business journeys from a normal place of work to a site but rather a journey from home to work which of course cannot be reimbursed tax free.
An employee’s home would not be regarded as the normal place of work unless there is an objective requirement that the duties of the office or employment must be performed at home. It is not sufficient for an employee merely to carry out some of the duties at home.
Site based employees
A site based employee may be described as one who does not have a fixed base and who, in the course of their employment, performs substantive duties on behalf of the employer at different locations. By definition such an employee cannot claim that the normal place of employment is at the employer’s business premises.
A site based employee can however receive “country money” tax free from an employer where the employee is working at a site which is 32km (20 miles) or more from the employer’s base under agreement between Construction Industry Federation and the Construction and Electrical Workers Unions.
The tax free payment of country money will not apply where:
- The employee does not incur the expense of travelling to and from the site.
- The employee is provided with board and lodgings by the employer.
- The employee is recruited to work at one site only.
Employers will sometimes simply provide accommodation and meals at the temporary location where the employee is working. A taxable benefit will not arise where the following conditions are satisfied:
- The accommodation is not the principal private residence of the employee.
- The rent paid by the employer is reasonable for the location.
- The reimbursement for the meals represents no more than a reasonable reimbursement of the cost.
For a more in-depth outline of mileage and subsistence rules and rates please refer to our Mileage and Subsistence blog post.