Revenue focuses on expenses where firm has sole employee
There are many people who were previously PAYE employees who have 'gone out on their own', and rather than continue as sole traders, have set up companies to continue to provide these services in this manner.
The Revenue Commissioners recently issued notices to many contractors and freelancers who have set up companies for consultancy services, where the majority of these consultancy services are being provided to one company.
Revenue are examining these activities to ensure best tax practice in relation to these types of arrangements.
The focus of the investigations is on expenses, particularly travel, subsistence and similar expenses being claimed in these companies by the owner engineers, IT and other contractors.
The investigations are not currently aimed at challenging the employment status of the contractors and whether there is a contract of service or contract for services issue, which would in turn determine whether the contractor is self-employed or an employee.
Revenue is instead examining whether the directors of the company providing the services should be regarded as direct employees of the entity for which the services are being provided. Deciding what level of expenses that can be claimed in relation to travel and other tax deductible expenses is of the utmost importance.
Where an employee performs the duties of their employment whilst temporarily away from the normal place of work or, is working abroad on a foreign assignment, allowable subsistence expenses can be reimbursed tax free on the basis of either of the following:
* Acceptable flat-rate allow-ances or,
* Actual expenses which have been vouched with receipts.
Time spent at the normal place of work and on journeys between home and the normal place of work do not reckon as a qualifying absence.
There are two types of flat-rate allowance schemes that are acceptable for tax purposes. In both cases, the employer must operate a satisfactory recording and internal control system.
a) This provides for the reimbursement of subsistence expenses up to the level of the prevailing schedule of Civil Service rates, where the employee bears the cost of the relevant subsistence expenses (including accommodation and meals, as appropriate). This scheme may be used without specific Revenue approval.
b) This also provides for the reimbursement of subsistence expenses based on any other schedule of rates and related conditions which do no more than reimburse the employee for actual expenditure incurred. Revenue approval is required for such a schedule.
Where subsistence expenses are reimbursed by employers to employees on the basis of actual costs incurred, the amount so reimbursed will generally not exceed the amount which would be payable in respect of the allowable business trips under the prevailing schedule of Civil Service rates.
Where an employee's actual subsistence expenses are reimbursed in full without any tax being deducted by an employer, the question of an income tax claim by the employee in respect of those expenses does not arise.
A self-employed person generally can set off the motor expenses in respect of the use of a private car for business purposes and also any travel expenses to the extent that they have been incurred for business purposes and, similar to the above, are not between home and the 'normal place of work'.
Separate from allowable travel expenses, expenses that are incurred for client entertainment are specifically not allowable for tax purposes.
Expenses that incurred on a personal basis and not for the purposes of the trade of the company are also not allowable.
It should always be remembered that even though it may be a company with only one employee, the company should not be used as a 'personal piggy bank' for the director, as severe tax consequences may ensue.
It is imperative to ensure that the expenses being claimed are allowable for tax purposes
Simon Ball is the founder of SB Tax Consultants and an associate of the Irish Taxation Institute. www.sbtaxconsultants.com