Key Post Revenue crackdown on contractors' expenses - what should a contractor do now?

[mandelbrot]

Thanks for that, only spoke to him last Monday and he said that he spoke to Revenue when I started up and the subsistence wasn't an issue... its depressing to think I will get penalized for incorrect advice.

Well who actually pays the penalty is something that's between you and your accountant...

 

[Setanta12]

well who actually pays the penalty is something that's between you and your accountant...

+1.

 

[Joe_90]

Thanks for that, only spoke to him last Monday and he said that he spoke to Revenue when I started up and the subsistence wasn't an issue... its depressing to think I will get penalized for incorrect advice.

Subsistence was never allowed to sole traders so he spoke to Revenue when I started up and the subsistence wasn't an issue does not wash.

You may have an opportunity to make a disclosure and reduce the penalty. But you owe the tax as you claimed a deduction for something you were not entitled to. Who pays the interest and Penalty is a matter for you and your accountant.

I agree with Mandelbrot it's surprising how many "accountants" advise sole traders to claim mileage and subsistence.

 

[T McGibney]

Thanks for that, only spoke to him last Monday and he said that he spoke to Revenue when I started up and the subsistence wasn't an issue....

This sounds bizarre. Real accountants don't normally go behind their customers' backs and discuss their individual deduction entitlements with Revenue.

Thanks for that, only spoke to him last Monday and he said that he spoke to Revenue when I started up and the subsistence wasn't an issue... its depressing to think I will get penalized for incorrect advice.

On the other hand, even a tiny bit of research on your part, even reading the personal finance pages of the newspapers, would have given you some inkling of what you can and cannot claim as a deduction against tax. And when you're in business, you have an obligation to look out for yourself because if you're not doing it, nobody else will.

 

[mandelbrot]

On the other hand, even a tiny bit of research on your part, even reading the personal finance pages of the newspapers, would have given you some inkling of what you can and cannot claim as a deduction against tax. And when you're in business, you have an obligation to look out for yourself because if you're not doing it, nobody else will.

A tad strong there I think Tommy - the majority of people have no interest in getting to grips with that sort of stuff, and leave it to a fee-charging professional.

IMHO if the OP has taken care at day 1 to get a recommendation for their accountant, and checked that they are a member of a professional body, then they shouldn't have to be second guessing them on their advice. Otherwise what are they paying them for.

 

[T McGibney]

A tad strong there I think Tommy - the majority of people have no interest in getting to grips with that sort of stuff, and leave it to a fee-charging professional.

IMHO if the OP has taken care at day 1 to get a recommendation for their accountant, and checked that they are a member of a professional body, then they shouldn't have to be second guessing them on their advice. Otherwise what are they paying them for.

I would be amazed if the person whom the OP used is a practising member of a professional body. If they are then the OP should be seeking redress, if necessary through the professional body.

While I agree that most people have no interest in engaging with technical tax detail, they still have a responsibility to educate themselves with the basics of accounting, tax, VAT, insurance, contract law, employment law, health & safety, vehicle maintenance and a whole lot more. That's an integral part of being self-employed.

 

[Bronte]

On the other hand, even a tiny bit of research on your part, even reading the personal finance pages of the newspapers, would have given you some inkling of what you can and cannot claim as a deduction against tax. And when you're in business, you have an obligation to look out for yourself because if you're not doing it, nobody else will.

I take issue with this as most normal people hire accountants to do their taxes and ensure they are revenue compliant.

But I agree that most people should try and research their obligations, because they may not be able to rely on their accountants when the **** hits the fan with revenue.

 

[yop]

I take issue with this as most normal people hire accountants to do their taxes and ensure they are revenue compliant. .

Agreed, get off the high horse there Tommy, that is what they are paid to do, if you get an electrician to wire your house do you also learn who to wire a house to understand if they are doing it right?
I paid them to do my accounts and make me compliant, hitting back at me on this is a off the mark.

 

[T McGibney]

Agreed, get off the high horse there Tommy, that is what they are paid to do, if you get an electrician to wire your house do you also learn who to wire a house to understand if they are doing it right?
I paid them to do my accounts and make me compliant, hitting back at me on this is a off the mark.

No high horse, but there is a major difference between a wiring task that needs an electrician, and an individual's multifaceted tax compliance obligations in the course of running a business.

An electrician completes a wiring job, issues a cert to that effect, and walks away. The customer knows then they can rely on this, without necessarily knowing anything about the electrics.

On the other hand, every time a business person does practically anything in their business they need to be conscious of tax and other compliance issues.

Unless they can afford the cost of a full-time accountant, they cannot farm all these obligations out to a third party and they must at the very least have a basic understanding of what they are doing.

 

[DB74]

Hi Bronte,

The cases in question are audits of Ltd Companies set up by a contractor, effectively a one-man band, rather than audits of self-employed individuals. So Bronte Ltd as opposed to Bronte.

Bronte Ltd contracts with the "employer" (Multinational PLC) to provide the services of Bronte.

Revenue aren't (yet at least) trying to look-through Bronte Ltd to impose an employment relationship between the PLC and Bronte performing the work. The employment relationship exists between the Bronte Ltd, and Bronte.

The thrust of the project has been to identify cases where Bronte Ltd is invoicing a customer, and only paying a relatively small salary to Bronte, but also paying out substantial amounts in tax-free expenses to this employee, in some cases the expenses exceeding or being a multiple of the salary.

So Bronte might go from being a PAYE employee of the multinational, earning €65k, to being an employee of Bronte Ltd, which invoices €80k p.a. to the same company to provide Bronte's services. Bronte is paid a salary of €33k, maximising her standard rate tax band, and also pays Bronte Junior, a teenage child, 9k p.a. for miscellaneous office type work. Then Bronte receives €30k in travel and subsistence payments from Bronte Ltd, tax-free, for travelling between the company base (at home) and the client's premises.

Bronte is delighted, because she is now netting way more take home pay.

The final customer is delighted, because they have gone from having an employee costing them €65k + 10.75% employers' PRSI + 8%-10% annual leave + various employers' obligations (redundancy entitlements etc...), to having a more flexible arrangement with a lower overall cost to them.

The exchequer, via Revenue, is sad, because it is losing substantial revenues from the arrangement - if there is legitimate avoidance involved they might decide to address it via legislation, but if the loss is via evasion in the form of non-allowable tax-free payments, that's a different matter. Hence the Revenue focus on the area, and the results would appear to indicate a good deal of the latter was/is present.

Have to take issue with some of this, specifically the bit I have highlighted in bold

In my experience this is not the case. Most normal people just want to go to work, do their days work and get paid without having the headache of looking after the red tape that goes with running a limited company, eg liaising with accountants, keeping the tax man happy and maintaining CRO returns up-to-date lest they miss a date by one day and have to suffer an audit, another joke of legislation which merely serves to increase red tape for small companies.

In addition to this they don't get holiday pay, sick pay, redundancy, jobseekers benefit etc, all of which accompany a standard employment. Where is the benefit to someone coming off jobseekers to get a 6-month contract with a multi, for which they have to set up a Limited Company, do the work and at the end of the 6 months get nothing, not even Jobseekers Benefit anymore because their last PRSI Class will now be Class S.

However due to the lack of employment in this country over the last few years, the large multis are fleecing the ordinary man on the street here and Government/Revenue are doing absolutely nothing to stop it.

Where are NERA in this situation, coming in to look through these contracts and declare them bona-fide employments, which is what they are, lets be honest about it

Where are Revenue in doing the same thing, they were quick enough to determine that Locum Doctors and Pharmacists were employees and couldn't hold self-employment status, despite overwhelming evidence to support this case.

Instead of having the balls to stick up to the multis and insist that they take on people as employees, Revenue as usual, take the easy option and go after the one-man band companies and get their pound of flesh here.

So if your post is an indication of the Revenue thinking in this matter then Revenue really need to get their heads out of their orifices (sorry typo, meant offices!) and start asking around to to find out the real lay-of-the-land

 

[T McGibney]

+1 on all counts there.

It's a repeat of the banks' DIRT evasion scam, where the architects of the racket (the banks) walked away scot-free while the suckers whom the banks importuned into the racket got nailed to the wall.

 

[mandelbrot]

+1 on all counts there.

It's a repeat of the banks' DIRT evasion scam, where the architects of the racket (the banks) walked away scot-free while the suckers whom the banks importuned into the racket got nailed to the wall.

Your posts around this area are very confusing Tommy - on the one hand you've posted previously in favour of the contracting mode of having labour supplied, but now you're supporting DB74's comments about the State coming in and tearing up company law and contract law to look through the separate legal identity of contracting arrangements through Ltd co's, and impose PAYE status.

Certainly the structures that have arisen appear to have been driven by the desire of the MNC's not to have to employ labour via employees, with all the responsibilities that entails. They pay a premium to acquire labour via different structures because it suits them that way. But where's the racket that they're running?

The "racket" such as it is, is that somewhere along the way people advising on the structures started telling the contractor that they were OK to claim the cost of getting to and from work as a tax-free reimbursable expense - I don't see how that one can be hung on the MNC's unless there's evidence that they were involved in selling that particular pup.

So on the one hand you seem to be saying it's the MNC's fault because the whole structure is a dance to their tune, and on the other hand it's the contractors' fault for not checking their entitlement beyond paying a professional fee to someone to do it for them - that's a bit of a cop out. The reality is the majority of the fault has to lie with the person or people, who were being paid to think about and advise on it, saying: "it's OK to claim X, Y or Z as a business expense under this structure", because ultimately that's what is causing the grief.

And sure, there are going to be shades of grey in some cases (as to normal place of work), but there are LOTS where, as Bronte has pointed out, a person seamlessly continues on doing the exact same job and all that changes is the legal / contractual structure around it at the behest of the employer - in those cases it is quite clear cut - why would you be entitled to expense the cost of your commute next week when you couldn't last week. I've heard of cases where people based their companies out of parents' houses because they lived too close to their job to be able to claim enough tax-free expenses... is that the MNC's fault?!

Sure, we could have the State blunder in and insist on PAYE employments, but I think we're all intelligent enough to realise what the consequence of that would be in a lot of cases / industries. Much better that the people working in these structures just comply with their obligations. Or else allow everyone to claim deductible expenses for the cost of their commuting, and do away with tax-free reimbursements - I commute 150 miles round trip and can't claim a dime for it, so I'd be all in favour!!

 

[mandelbrot]

Where is the benefit to someone coming off jobseekers to get a 6-month contract with a multi, for which they have to set up a Limited Company, do the work and at the end of the 6 months get nothing, not even Jobseekers Benefit anymore because their last PRSI Class will now be Class S.

How many instances of this have you come across though, in reality?

The hypothetical person you're talking about above would have come off their contributions based payment and onto a means tested payment by the time the hypothetical 6-month contract would have elapsed anyway...

In addition to this they don't get holiday pay, sick pay, redundancy, jobseekers benefit etc, all of which accompany a standard employment.

And is the rate of pay not higher to offset, to some extent, the loss of these benefits? Just for balance I'd suggest there are plenty of people in skilled jobs / professions who are very happy with the contracting model of working, just as there are plenty who'd prefer to be on payroll.

 

[mandelbrot]

...maintaining CRO returns up-to-date lest they miss a date by one day and have to suffer an audit, another joke of legislation which merely serves to increase red tape for small companies.

Having a separate legal identity comes with a price, it has to - in the absence of the deterrent effect of statutory audit, how else would you ensure small companies engage with their obligations in a timely way? When I worked in practice, the threat of an audit (and explaining that our fee would increase by up to 100% as a result) was a Godsend in getting a response from some people.

Ten months from the end of the financial year is hardly an unreasonable window to get your house in order, is it?

 

[T McGibney]

Your posts around this area are very confusing Tommy - on the one hand you've posted previously in favour of the contracting mode of having labour supplied, but now you're supporting DB74's comments about the State coming in and tearing up company law and contract law to look through the separate legal identity of contracting arrangements through Ltd co's, and impose PAYE status.

Certainly the structures that have arisen appear to have been driven by the desire of the MNC's not to have to employ labour via employees, with all the responsibilities that entails. They pay a premium to acquire labour via different structures because it suits them that way. But where's the racket that they're running?

The "racket" such as it is, is that somewhere along the way people advising on the structures started telling the contractor that they were OK to claim the cost of getting to and from work as a tax-free reimbursable expense - I don't see how that one can be hung on the MNC's unless there's evidence that they were involved in selling that particular pup.

So on the one hand you seem to be saying it's the MNC's fault because the whole structure is a dance to their tune, and on the other hand it's the contractors' fault for not checking their entitlement beyond paying a professional fee to someone to do it for them - that's a bit of a cop out. The reality is the majority of the fault has to lie with the person or people, who were being paid to think about and advise on it, saying: "it's OK to claim X, Y or Z as a business expense under this structure", because ultimately that's what is causing the grief.

And sure, there are going to be shades of grey in some cases (as to normal place of work), but there are LOTS where, as Bronte has pointed out, a person seamlessly continues on doing the exact same job and all that changes is the legal / contractual structure around it at the behest of the employer - in those cases it is quite clear cut - why would you be entitled to expense the cost of your commute next week when you couldn't last week. I've heard of cases where people based their companies out of parents' houses because they lived too close to their job to be able to claim enough tax-free expenses... is that the MNC's fault?!

Sure, we could have the State blunder in and insist on PAYE employments, but I think we're all intelligent enough to realise what the consequence of that would be in a lot of cases / industries. Much better that the people working in these structures just comply with their obligations. Or else allow everyone to claim deductible expenses for the cost of their commuting, and do away with tax-free reimbursements - I commute 150 miles round trip and can't claim a dime for it, so I'd be all in favour!!

A few digs at me within those paragraphs, let me clarify:

I have never taken issue with the Revenue approach to the sort of defacto employment contracting arrangement where the contractor drives in to a premises at 9 every morning and goes home at 5 in the evening.

However I have taken exception to Revenue attempts to convince bona fide contractors, in business on their own account, that there is something iffy about their general modus operandi, and specifically about their entitlements to claim motor & travel expenses and other overheads as deductions against turnover for tax purposes.

I also take exception to Revenue's "one size fits all" policy in dealing with such cases, despite the obvious reality that many cases differ from one another.

My point in relation to the multinationals is to echo @DB74s comments that Revenue seem to be all the time getting quite aggressive with the small guys while there never seems to be a focus on the dominant players within the industry. The DIRT fiasco and coverup is a very ugly precedent and it is shameful that Revenue are now repeating it.

And I take particular exception to your "and on the other hand it's the contractors' fault for not checking their entitlement beyond paying a professional fee to someone to do it for them - that's a bit of a cop out." comment which utterly distorts what I said on the other thread.

Do you really disagree with my view that a business person should have a broad general awareness of the issues that affect them?

 

[T McGibney]

Ten months from the end of the financial year is hardly an unreasonable window to get your house in order, is it?

I think you misunderstand the concept of Companies Office ARDs. These are set, not according to the year-end date, but on the basis of the company's date of incorporation. In the case we saw here yesterday, an ARD in March could leave the company owner in question with as little as 12-15 weeks to file returns post-year end. There are measures one can take to avoid this sort of situation, but only if the person knows their way around the intricacies of CRO rules.

 

[mandelbrot]

I think you misunderstand the concept of Companies Office ARDs. These are set, not according to the year-end date, but on the basis of the company's date of incorporation. In the case we saw here yesterday, an ARD in March could leave the company owner in question with as little as 12-15 weeks to file returns post-year end. There are measures one can take to avoid this sort of situation, but only if the person knows their way around the intricacies of CRO rules.

Again, this is something that, in general, people pay the professional to manage for them, and if they don't then it's their responsibility to figure out how to extend etc. as necessary to ensure a decent window for filing - when I was responsible for managing the company secretarial work for upwards of 100 small/medium companies I always did my best to ensure there was the maximum window of time, and I'd suggest this is the norm if you look at the majority of generally compliant companies' filings, they follow the pattern of year-end, 9-month gap, CT return followed by CRO return...

 

[T McGibney]

Again, this is something that, in general, people pay the professional to manage for them, and if they don't then it's their responsibility to figure out how to extend etc. as necessary to ensure a decent window for filing - when I was responsible for managing the company secretarial work for upwards of 100 small/medium companies I always did my best to ensure there was the maximum window of time, and I'd suggest this is the norm if you look at the majority of generally compliant companies' filings, they follow the pattern of year-end, 9-month gap, CT return followed by CRO return...

This hardly invalidates @DB74's point that the statutory audit "deterrent" as you call it represents unnecessary red tape.

Whether or not the "late filing = compulsory statutory audit" deterrent is necessary depends on one's perspective, but it is worth noting that the UK doesn't impose such a penalty on late filers, nor if memory serves me correctly, do any of the leading continental EU economies.

 

[mandelbrot]

A few digs at me within those paragraphs, let me clarify:

I have never taken issue with the Revenue approach to the sort of defacto employment contracting arrangement where the contractor drives in to a premises at 9 every morning and goes home at 5 in the evening.

I hate it when we fight

No personal offence meant, so apologies if any was taken - I genuinely couldn't get a handle on your perspective on the issue - I'm pretty sure you took issue with me previously using the phrase pseudo self-employment or de facto employment on this or another similar thread a while back. (EDIT: it was a different but similar thread http://www.askaboutmoney.com/showpost.php?p=1342459&postcount=8)

However I have taken exception to Revenue attempts to convince bona fide contractors, in business on their own account, that there is something iffy about their general modus operandi, and specifically about their entitlements to claim motor & travel expenses and other overheads as deductions against turnover for tax purposes.

I also take exception to Revenue's "one size fits all" policy in dealing with such cases, despite the obvious reality that many cases differ from one another.

I don't necessarily agree that such an approach exists, every case should be taken on it's own facts. But from a qualified auditor's perspective, if you've looked at 3 cases in a particular industry over the past few months where the circumstances were similar and lots of expenses were clearly not allowable, wouldn't you have a valid basis for believing there's a trend, and would you not rightly approach later cases with a level of skepticism proportionate to the experience of the earlier cases..?

My point in relation to the multinationals is to echo @DB74s comments that Revenue seem to be all the time getting quite aggressive with the small guys while there never seems to be a focus on the dominant players within the industry. The DIRT fiasco and coverup is a very ugly precedent and it is shameful that Revenue are now repeating it.

I don't know a thing about the DIRT fiasco so I can't speak to its suitability or not as a comparator, but in this case the MNC's are simply paying for labour, am I missing something as regards their involvement in the overclaiming of expenses by the people contracting to provide that labour?

And I take particular exception to your "and on the other hand it's the contractors' fault for not checking their entitlement beyond paying a professional fee to someone to do it for them - that's a bit of a cop out." comment which utterly distorts what I said on the other thread.

Do you really disagree with my view that a business person should have a broad general awareness of the issues that affect them?

There's only one thread Tommy! And I don't think it distorts what you said, but maybe I'm not understanding you correctly - you seem to think that people in business need to understand what is or isn't an allowable expense, and I believe that they don't, if they're willing to pay someone a professional fee for advice about what to claim or not.
If one of your clients came to and said, "I want to buy X, can I claim it against my tax bill?", and you say yes and are completely wrong, then that has to be your fault. And if they don't even ask you, but you actively tell them, as is the case in a lot of the very straightforward contractor cases, that they should be claiming (say) mileage & subsistence that they're not entitled to, then why should they have any reason to doubt or second guess you.
Some of the best business people I know subscribe to the belief that a little knowledge is a dangerous thing, and accept that since they're never going to be fully competent in tax-related matters, they should pay someone else to do it.

 

[T McGibney]

There's only one thread Tommy! .

There is indeed, my bad.

If one of your clients came to and said, "I want to buy X, can I claim it against my tax bill?", and you say yes and are completely wrong, then that has to be your fault. And if they don't even ask you, but you actively tell them, as is the case in a lot of the very straightforward contractor cases, that they should be claiming (say) mileage & subsistence that they're not entitled to, then why should they have any reason to doubt or second guess you.

But I think this misunderstands how a good advisor deals with a question like this. The initial response to a question is usually another question, to establish the context in which the question is posed. It is usually the context that determines the answer.

If the advisor shoots from the hip without clarifying the exact nature of what is or isn't involved, they are indeed laying a trap for their client, and for themselves.

And if they don't even ask you, but you actively tell them, as is the case in a lot of the very straightforward contractor cases, that they should be claiming (say) mileage & subsistence that they're not entitled to, then why should they have any reason to doubt or second guess you.

Note though the situations in the recent past where contractor companies had Revenue Audits and where audit inspectors had implicitly or explicitly accepted the validity of directors' expense claims, including conducting detailed reviews of claims submitted, only for Revenue at higher level to turn around later on and change the basis on which they had previously treated such claims, leaving in the lurch contractors and advisors who had acted in good faith on foot of the longterm Revenue treatment of same.

Some of the best business people I know subscribe to the belief that a little knowledge is a dangerous thing, and accept that since they're never going to be fully competent in tax-related matters, they should pay someone else to do it.

But the fact remains that they are well capable of handling operational tasks like issuing invoices & charging VAT etc without continually relying on professionals to do the thinking for them.