Revenue issues guidelines for determining employment status for taxation purposes following Karshan Judgment

Following the Supreme Court’s landmark judgment delivered in The Revenue Commissioners v. Karshan (Midlands) Ltd. t/a Domino’s Pizza [2023] IESC 24 (Karshan) (which we have previously covered here), Revenue has issued a new Tax and Duty Manual (the Guidelines) (Part 05-01-30) outlining Revenue’s views relating to how the judgment has altered the process for determining the employment status of individuals for taxation purposes in Ireland.

Recap of the Karshan decision-making framework

By way of a reminder, the five questions in the Karshan decision making framework as set out in the Supreme Court judgment are:

1. "Does the contract involve the exchange of wage or other remuneration for work?”.

2. "If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?”.

3. "If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?”

4. "If these three requirements are met, the decision maker must then determine whether the terms of the contract between the employer and worker interpreted in the light of the admissible factual matrix, and having regard to the working arrangements between the parties as disclosed by the evidence, are consistent with a contract of employment, or with some other form of contract having regard, in particular, to whether the arrangements point to the putative employee working for themselves or for the putative employer

5. "Finally, it should be determined whether there is anything in the particular legislative regime under consideration that require the court to adjust or supplement any of the foregoing.”.

Revenue guidelines – summary of key points

• Revenue state that the five-step test set out in the Karshan judgment now provides a clear decision-making model for businesses to determine the employment status of each worker for taxation purposes. Revenue have set out their expectation that there will be an increase in the number of workers that will be determined to be employees for tax purposes, once the five-step framework is applied to their facts and circumstances.
• The newly published Guidelines set out an overview of each of the five questions, which form the Karshan five-step decision making framework. The Guidelines also provide specific commentary on how Revenue believes that the five-step test should generally apply in the case of certain specific workers/industries, namely: construction workers, part-time, casual and seasonal workers, workers engaged in a domestic setting, couriers and other transport providers, workers in the media, public sector workers and platform operators.
• Revenue provide examples of the application of the five-step test to various factual scenarios. While these examples represent Revenue’s own views/analysis, the examples should be of assistance for employers and advisors when they are attempting to conclude on the employment status of workers, and whether they need to reconsider or alter the current tax treatment of such relationships.
• The Guidelines also note that the judgment in Karshan solely relates to the tax treatment of individuals and that Revenue’s view of the tax treatment of services supplied through a Personal Services Company, or a Managed Services Company has not changed on account of the judgment. The Guidelines state that Revenue do not look through corporate structures, except in very limited circumstances specifically provided for in the Taxes Consolidation Act 1997.

What businesses/employers must do going forward

Revenue notes their expectation that employers will be able provide evidence of the relevant analysis done to apply the five-step framework when a worker is engaged, including, where appropriate, looking beyond the simple wording of the contract between the business and the worker.

The Guidelines also note that as relationships between businesses and individuals can change over time, employers should regularly review any relevant arrangements to ensure that the application of the framework at that later point in time would not result in a different determination.

Employers should at this point consider the impact of the Karshan decision on their business, review relevant contractual and services arrangements with individual service providers in light of the judgment and continue to ensure that any arrangements with contractors or other individual service providers are regularly reviewed to ensure that the correct tax treatment is applied.

Key Contacts

For further information in relation to this topic, please contact Paul Fahy, Partner, James Somerville, Partner, Amelia O’Beirne, Partner, Stephen Egan, Senior Associate, Aidan Burton, Solicitor, or any member of A&L Goodbody's Tax Department.

Date published: 23 May 2024