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Government planning PAYE crackdown on contract workers

Government planning PAYE crackdown on contract workers
10 January 2010 By Ian Kehoe, Chief News Correspondent, Sunday Business Post.

Thousands of contract employees will be brought into the PAYE net for the first time as the government moves to close a loophole in the tax system.

The move is designed to ensure that contractors who are de facto employees cannot avoid PAYE by being paid through limited companies they establish. The changes will also apply to certain professionals, such as doctors and pharmacists, who carry out locum work but avoid PAYE due to their status as short-term contractors.

The move is particularly significant for IT professionals and workers at multinational firms, many of whom operate as contractors rather than salaried employees. This reduces the tax cost for the worker and the administrative burden for the employer.

However, the government is moving to ensure that in circumstances where a worker is effectively employed by a company, PAYE should be paid regardless of the employment structure. The new system is designed to tax what is known internationally as ‘disguised employment’. A number of other countries, including Britain, have already introduced such legislation, and the Revenue Commissioners are believed to have been pushing hard for the introduction of the legislation here.

The proposals are being developed by the government and are expected to be included in next month’s Finance Bill. The government believes the new regime will broaden the tax base, and make the taxation system more equitable and fair.

Under the existing system, workers can minimise their tax bill by operating through a limited firm. Their employer then agrees to hire that firm as a contractor, therefore negating the need to pay PAYE. The money can then be paid out in the form of dividends. According to tax sources, workers can also save tax by splitting ownership with family members in order to place income in lower tax bands.

The British government introduced its legislation in 1999, stating at the time that it was designed to ‘‘counter avoidance in the area of personal service provision’’. The then chancellor Gordon Brown expressed concern about the hiring of individuals through their own service companies ‘‘so that they can exploit the fiscal advantages offered by a corporate structure’’.

The move is part of a package of anti-avoidance measures that are expected to be contained in the Finance Bill. The bill, which gives legal effect to the budget, will also include measures to improve the effectiveness of the Revenue in tackling the grey economy.