Revenue to hit contract tax dodgers

By Niall Brady

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. Revenue has attempted to draw more taxpayers into the PAYE net in recent years, even those without employment contracts, if they work mostly or exclusively for a single client. 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.
While specific professions are not referred to in a letter sent by Revenue to the Irish Tax Institute on Tuesday, IT contractors and other professionals with their own companies are the intended targets, say tax practitioners.

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 businesses for which they work.

The letter says the tax authorities are currently reviewing companies and their directors in the southwest whose sole business is providing services to other companies. “We have established that in many cases, there are deficiencies in accounting for input costs and expenses, with the result that there has been a significant understatement of tax liability to the benefit of the directors,” the letter says.

It adds: “As a result of these findings, this area will be a significant focus of regional inquiries through 2013, and it is likely that similar explorations will be initiated in other regions.” It adds that Revenue views the underpayment of tax as “stemming from deliberate behaviour”. Tommy McGibney of Thomas McGibney & Co chartered accountants in Cavan said contractors enjoy significant tax advantages over those taxed as employees under PAYE. “Employees are not allowed to claim tax deductions for the costs of traveling to their normal place of work,” he said. “Contractors are claiming these deductions, however, even when they spend most of their time working on-site at a client’s premises.”