Response to Dept of Finance consultation paper on Contractors
The Departments of Finance and Social Protection issued a Consultation paper on what they term Intermediary-type Structures ie Contractors with a call for submissions closing on 31 March 2016.
We have reviewed the Consultation Paper and are disappointed it does not engage with the reality of the world of professional contracting and is more narrowly focussed on perceived losses of revenue to the Exchequer.
References to zero hours contracts appear as emotive headline grabbing comments but have little or no reality to Intermediary-type contracts. If the Departments of Finance and Social protection were concerned about zero hour contracts, I am sure many parties would be very keen to contribute to a consultation paper.
This was an opportunity to acknowledge the world wide trend to professional contracting and to plan accordingly for that change. Unfortunately this opportunity appears to have have been missed.
We do however hope that the responses from ourselves and a number of our clients will encourage the Departments of Finance and Social Protection to reassess their narrow view and look at building on the strength of this sector.
Here is our response to the Call for Submissions.
Consultation on Intermediary-type Structures
Department of Finance
Upper Merrion Street
Dublin D02 R583
31 March 2016
Noone Casey is a firm of Chartered Accountants. We have acted for many professional contractors and their Personal Service Companies (PSC) since 1992 and will continue to do so. We have an excellent understanding of the professional contractor market place and are acknowledged as experts in this field.
I refer to your call for submissions from interested parties on possible measures to address the ‘loss to the Exchequer that arise under the use of Intermediary-type structures and self-employment arrangements’.
If the purpose of the Call for Submissions is purely to address ‘the loss to the Exchequer’ you have missed an opportunity to define the contracting sector within the Irish commercial context.
We believe that your Call for Submissions is flawed in that it does not recognise Professional Contractors as a business/entrepreneurial sector in its own right. Phrases such as ‘zero hour contracts’ have no relevance to PSCs for professional contractors.
We believe professional contractors operating through their own PSCs are an intrinsic element of the technology, engineering and pharmaceutical sectors and will continue to provide services on a project by project basis as and when the commercial and technological need requires.
Many professional contractors contract out of choice. Their PSC is a compliant legal entity focussed on winning ever more technically challenging (and better paid) contracts. The PSC is not set up to reduce taxes but rather to provide a vehicle for the professional contractor to meet their commercial and legal requirements.
The National Contractors Project carried out by the Revenue Commissioners unearthed a number of instances where over claiming of expenses by Contractors was apparent. As with many Revenue Commissioners’ Projects, the success or otherwise of the Project will be in the change in behaviour of the wider population rather than the specific taxes collected as part of the audits. We note the follow up to the National Contractors Project, if there is to be one, has not commenced and that there has not yet been any quantifying of the behavioural change in claiming expenses. This suggests that not only is your concern over loss of Revenue to the Exchequer premature but is also at this stage unquantifiable.
Noone Casey is on record in the past and can again state that we do not believe that Managed Service Companies (MSC) where at least six unconnected shareholders contract as individuals through that MSC are appropriate vehicles for professional contractors. This structure which has been promoted by certain financial advisory companies raises concerns over the appropriateness of the status of the shareholder/employees particularly with regard to the appropriate PRSI class.
We believe your concern over different pension and tax planning opportunities is unwarranted. It would be beneficial to quantify the ‘losses’ to the Exchequer where PSCs have utilised the more favourable pension planning opportunities available to other SME/Micro businesses.
Contracting can be an unstable risky sector – this reflects the true commercial nature of the business. Your document notes those risks but does not appear to accept that this commercial reality matches the risk profile of a genuine business. You appear to be overly focussed on the contractor’s position when a contract is won rather than the bigger picture of building a business that is in a position to win such contracts. The business risk is in winning the contract not in the fulfilling of the contract.
Having reviewed the Purpose and Background to your Consultation paper, we are at a loss as to how you believe the ‘Options for addressing tax and PRSI issues’ address the relevant issues. Each of these options appears merely to be tax trawling. You have not considered Professional Contracting to be a valid and genuine business model.
- Treating Professional Contractors as Class A contributors and their incomes subject to Schedule E income is simply ignoring the reality that contracting is a genuine business. This approach which is in use in the UK under the IR35 legislation has been proven to be ineffective as the defining IR35 clauses are constantly being updated and amended to try and deal with the realities of the commercial world. There is no sense in mimicking an unsuccessful broken structure.
- We do not believe there is any significant hoarding of undistributed income in PSCs. Applying close company type surcharges to such undistributed income will not generate significant funds for the Exchequer and will hardly justify their introduction.
We note you have given little consideration to those individuals who are contracting to buy in to a Class A PRSI contribution model. This is a major issue not just for those contracting but also other individuals operating in Class S contribution roles. Allowing such individuals pay the higher rate of combined Employer and Employee PRSI will address the concern of loss to the Exchequer and allow those individuals entitlement to the full range of benefits available to Class A contributors.
We do not believe you can seek additional PRSI contributions without extending the benefit entitlements to the contributors.
We note where Professional Contractors are operating through MSCs that the structure and intent behind the formation of those companies is subject to challenge.
Self-employed and proprietary directors should have the right to opt in to a Class A PRSI Contribution model.
We strongly believe that appropriately managed compliant PSCs operate in a commercial sector that is adequately regulated by both the Revenue Commissioners and the Companies Registration Office. As genuine businesses, the income tax/PRSI treatment should be comparable with other SME and Micro businesses and not be differentiated against on the basis of the commercial role carried out.
If you wish to discuss any of the above issues please do not hesitate to contact me.
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