Contractors need to know their tax boundaries
Published 13/03/2014 | 02:30
Contracting is particularly popular in certain sectors such as ICT and other professional services. While there are many benefits to both service providers and their clients, there are a number of revenue-related issues that need to be carefully considered.
As a contractor you are a more mobile worker, which will allow you to move from one project to another. This can be a welcome proposition for someone who doesn't like to be in the same surroundings for too long. As a contractor, you also ultimately become your own boss to some degree, and you command a certain rate of pay which is higher than those in long-term employment.
While it is often true that hourly rates for contractors are higher, there are reasons for this. Job security is one of them. Contractors are, by their nature, often engaged on a short-term basis – their higher wages may be needed to cover 'down time' between jobs. On the flipside, this might be a plus for someone considering this option – they have the freedom to work for extended periods of time but then also to take some time out.
Before making a move there are a variety of considerations to take into account.
Contracting brings with it various financial and regulatory responsibilities that PAYE employees don't have to think about.
One of the primary responsibilities is that you are now accountable for paying your own taxes, unlike PAYE workers where tax is deducted at source.
This means you are obliged to track your earnings and where you are in receipt of a gross wage (if you have incorporated and are billing via your own company), adequate provisions for tax have to be made. Being paid gross as opposed to net is a key difference compared to PAYE employment, and one that can be difficult to adjust to.
Another point to note is that as a contractor you may incur higher expenses than other workers but a lot of this can be offset against a potential tax liability. However, it is vital to ensure that any deductions being taken from taxable income qualify as a legitimate business expense.
This has become a very thorny issue following Revenue's 2013 Contractors Project. Given the punitive penalties promised by Revenue in cases where expenses were being claimed incorrectly (Revenue has indicated it will treat such cases as a "deliberate behaviour" which attracts a greater penalty), it is vital that all contractors and potential contractors are up to date on the latest positions taken by Revenue to ensure compliance and if in any doubt about the legitimacy of a deduction, expert advice should be sought.
Travel is also considered a big expense for contractors. However, it's something that the Revenue are investigating more rigorously.
Revenue has insisted that regardless of the existence or otherwise of a dedicated office space, a contractor's home cannot be treated as a "normal place of work". It follows that the cost of travel to and from home may not be reimbursed free of tax. So an individual who works from home for four days a week and then travels to a client site once weekly will not be in a position to deduct any expenses incurred in respect of travel.
Needless to say this has provoked a reaction, and certainly seems at odds with established practice. Contractors may wish to consult a professional to establish if either a qualifying disclosure is required or if a defensible position may be taken in the event of a Revenue challenge. The main exception to the above rule is where an individual travels directly to an alternate place of work, either having initially travelled to their "normal place of work" or directly from home. A claim for travel expenses can be made in these circumstances.
Many companies employ family members either as employees or directors. It is important to note that while this may be common practice, the employment must be genuine. Revenue has judged that, in some of the cases, employment of family members "were not bona-fide".
In order for such employment to be adjudged genuine, 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.
As always, we would strongly advise any individual who is unsure on whether they may have contravened any of the above guidelines to immediately seek professional advice.
Revenue have bared their teeth on this issue in 2013 so non-compliance in 2014 will be very difficult to justify.
Barry Flanagan is a chartered tax consultant with Contractors.ie