n determining Fastbike's tax obligations are in relation to Alex, the first step is to investigate whether or not Alex is employed or if he is self-employed. There are a number of mitigating factors, which along with s.112 of the Taxes Consolidation Act 1997 , are examined in determining the employment status of an individual. These include pay arrangements, the individuals control over their work and their working hours, although even when these tests are considered a clear answer may not be achieved. Therefore, it of often the court's duty to provide a ruling on an individual's employment status, so we must look towards the history of case law in order to aid us in determining the relationship between Alex and fastbike.
The main test established by the case law in determining the employment status of an individual is whether or not that person is providing services under a contract of service of under a contract for services. In Market Investigations Ltd v Minister of Social Security , Cooke J. held that the individual was working under a contract of service and therefore an employee, and in doing so laid down the following test;
The fundamental test to be applied is this: Is the person who has engaged himself to perform these services performing them as a person in business on his own account? If the answer to that question is “yes” then the contract is a contract for services. If the answer is “no” then the contract is a contract of service”.
Another Irish case to examine is that of T Mooney v E P O'Coindealbhain and the Revenue Commissioners . Blaney J considered Mooney to be self-employed as (i) he was not obliged to perform any of the work personally, (ii) he was required to provide his own premises and the lower his expenses the more profit he made, (iii) his remuneration was not described as wages or salary, (iv) the remuneration could have been varied without his prior agreement, and (v) the contract referred to his remuneration as covering the “provision” of “facilities and services”.
The final case to consider on this matter is the leading Irish case in this area, Henry Denny & Sons . In this case, the Supreme Court held that she was employed under a contract of service and that therefore, she was an employee. There were four tests developed through case law which were applied in this case. The control test centres on the extent to which an individual has control over the work required to be done and the persons engaged to carry out the work. The integration test asks the question is the current position integrated into the company's business or is it a stand-alone position? The economic reality test centres on the economic reality of the situation, the reality of the contract being entered into and the intentions of the parties. Finally, the entrepreneurial test refers to the element of financial risk involved and the control the individual has over the profit that he or she could potentially make.
In respect of the ‘control' test, Alex has some degree of control over the work required to be done as he can reject any request, however, this will impact on his wages from other deliveries, linking in with the ‘entrepreneurial' test as it is a financial risk for him and reduces the profits which he can potentially make. This, one could argue, shows that Alex is a self-employed individual.
In applying the ‘integration' test, FastBike arrange courier deliveries as part of their on-going business. Therefore, the work that Alex does is not on a once-off or stand-alone basis. It is regular and recurring which points towards Alex being considered an employee. However, as the amount he is paid for deliveries varies depending on whether or not he rejects delivery requests at various times of the day, his remuneration is likely not fixed which is a persuasive indicator that he is likely not to be considered an employee of FastBike.
The third test to apply to Alex is the ‘economic reality' test. In this instance, Alex does not receive a fixed wage, his income is impacted by his decision to accept or reject requests at certain hours of the day. This leads towards Alex being considered a self-employed person.
The final test to consider is the ‘entrepreneurial' test. There is an element of financial risk involved for Alex as he may lose out on income by rejecting delivery requests at certain hours of the day. This shows that Alex has control over the profit which he can make which is persuasive in showing him to be a self-employed individual. There is further financial risk involved for Alex as he supplies his own motorcycle for making the deliveries and there is no indication that he is compensated in any way for his travel expenses. Further, it is likely that he will not be reimbursed by FastBike for the incremental cost of his motorcycle insurance. Alex has significant control over the profit which he can earn as there is no limit on the number of hours which he can choose to work every day. This is influential in determining that Alex is more than likely a self-employed individual as he controls the hours of work in fulfilling the job obligations.
I conclude that Alex is a self-employed individual. Based on this, the tax obligations of FastBike are as follows: PAYE should not be deducted at source from the income earned by Alex under the PAYE tax system. Alex should prepare his own tax return under the self-assessment system and his income should be taxed under Schedule D Case II as he is earning professional income from the provision of his courier service. As Alex is not an employee, there is no employer's PRSI to be deducted at source. USC should not be deducted at source either.
The purpose of this memorandum is to advise Peter of the tax implications of his business activities as a restauranteur and a seller of Frisbees. In order to deal fully with all the issues, I will examine each one separately.
Section 3(1) TCA 1997 describes a trade as including “every trade, manufacture, adventure or concern in the nature of a trade”. As can be established by this definition, a ‘trade' is very broadly defined in Irish tax legislation and as such, it can be difficult to determine if a particular activity constitutes trading, taking into account the above legislative definition of a trade. It can be inferred from the fact that Peter owns and runs his own restaurant that he carries on the trade of a restaurant. The income which Peter earns is Schedule D Case I income as governed by Section 18, TCA 1997 . As Peter runs his restaurant and is liable to Irish income tax under Schedule D Case I, Section 65 TCA 1997 sets out the basis of assessment of a Case I trade.
Firstly, in examining the legal costs incurred in defending the defamation action, the main rules for determining whether an expense is allowed as a deduction are as follows: (i) it must be revenue in nature, not capital, (ii) it must be an expense incurred wholly and exclusively for the purposes of the trade, and (iii) it must not be specifically disallowable in law. In analysing the legal costs incurred, they were not capital in nature. Therefore, it falls to the ‘wholly and exclusively' test to determine the tax implications for Peter. There is three elements to this test under S.81(2) TCA 1997. Applying these, it could be argued the legal expenses were not wholly and exclusive; the restaurant would have continued to trade regardless of the defamation case. Legal costs are not an expense which are specifically disallowed by law, however, as they fail to meet the ‘wholly and exclusively' test, no deduction should be allowed.
It is assumed that Peter used funds from the restaurant to travel to the US for two months to burnish his skills as a restaurateur. He also learned about management and marketing, which can be argued are activities ancillary to the restaurant trade and should be allowable expenses and meet the S.81 deductions test. However, the expense incurred by Peter on the anger management lessons cannot be attributed as a cost wholly and exclusively for the purposes of the trade as the anger management classes have a dual purpose , both a personal and professional purpose for Peter. A deduction should be allowed for the costs of travelling to the US and attending the restauranteur school.
To conclude on the restaurateur business of Peter, his restaurateur trade will be assessed to corporation tax under Schedule D Case I. Peter will not be allowed a deduction for the legal costs which he incurred and must add them back, thus increasing his corporation tax liability. He will also not be allowed a deduction for the cost of his anger management lesson. The costs of his trip to the US to burnish his skills as a restaurateur are allowable expenses.
Peter has discovered a new type of Frisbee in London which he views as being something that would sell very well in Ireland over the Christmas period. The key question which arises centres around is Peter carrying on a trade of selling Frisbees?
The UK case of Birmingham and District Cattle By Products Ltd v IRC established the legal precedent for the date of commencement to trade. The Court held that the trade commenced when the company first received raw materials for processing. The date of commencement to trade is important in determining the tax treatment of some expenses incurred prior to the date the trade began. This is legislated for in Section 82, TCA 1997 which outlines the rules of deductibility for pre-trading expenditure . The section allows a deduction for any expenses incurred within 3 years of the date of commencement to trade. Peter incurred costs doing market research for his new Frisbee business, these costs would generally be assumed to be incurred wholly and exclusively for the purposes of the trade, thus meeting the deductibility test under Section 81 TCA 1997.
During the mid 1950's, there was a Royal Commission that established the six ‘Badges of Trade' which aids companies and individuals in determining if a trade is being carried on.
The first badge is ‘The subject matter of the realisation' . In the case of Peter, he is planning to buy Frisbees to supply to customers over the Christmas period in Ireland. Accordingly, he has already sourced a supply chain and therefore, this is consistent with the assumption that he is carrying on a trade.
The second badge of trade is ‘The length of period of ownership' . In general, manufactured articles are bought and sold within a relatively short period of time. Applying this badge to the case of Peter, we are assuming that the rate of stock turnover will be quite high and the Frisbees will generally be sold on to the final customer shortly after acquisition by Peter.
The third badge is ‘The frequency of the number of transactions by the same person' . If an individual carries out a number of transactions which are substantially similar at the same time or in succession over a period of months, it is assumed that there is a trade being carried on. It is assumed that the frequency of the number of transactions by Peter will be quite high and is therefore consistent with the carrying on of a trade.
The fourth badge of trade is ‘Supplementary work on or in connection with the property realised' . This badge analyses if the manufactured articles are worked on in any way, shape or form during the period of ownership in order to bring it to a more appealing and marketable condition to any potential customers. Further, if any steps are specifically taken to attract a purchaser (including the colours of the product, the packaging of the product or the advertising campaign associated with the product) then there is evidence of trading. Applying this to the facts of Peter's case, it is quite clear that he is carrying out supplementary work on the manufactured articles. He is potentially changing the colour scheme to make the Frisbees more appealing to the general public, his customers. Further, he has undertaken market research with respect to the most appropriate type of packaging in which to sell the Frisbees.
The fifth badge of trade is ‘The circumstances which were responsible for the realisation' and this refers to how the disposal of the manufactured articles arises. If the disposal of the manufactured articles is as a result of the individual's personal circumstances, it is likely that a trade is not being carried. Applying the above badge to Peter, he is realising the sale of the Frisbees as he views the Frisbees as “being something which would sell very well over Christmas in Ireland”. Therefore, Peter is clearly selling the Frisbees with a view to realising a profit and this clearly shows that he is carrying on a trade.
The final badge of trade is ‘Motive' which refers to the reason for the sale of the manufactured articles. In Peter's case, it is very obvious that he is selling the Frisbees in order to make a profit as has been outlined in point five above.
Conclusion – Frisbee
Based on all of the above, I have concluded that Peter is carrying on a trade of selling Frisbees. Therefore, as a result of his business activities Peter will be subject to Irish corporation tax at the standard rate of 12.5% under Schedule D Case I in respect of both trades. In addition, Peter will be allowed the costs he has incurred on market research, i.e. the costs meet the S.81 deductions test as being incurred wholly and exclusively for the purposes of the trade. Also, those expenses which he has incurred prior to the date of commencement to trade per section 65 TCA 1997 will also be allowable costs as they meet the S.82 pre-trading expenditure test per the TCA 1997.
As has been set out above, Peter is carrying on two distinct and separate trades, both of which are taxable under Schedule D Case I and the standard rate of corporation tax of 12.5% will apply. In respect of the restaurateur trade, Peter will be allowed a deduction for the costs which he has incurred in travelling to the US to burnish his skills as a restaurateur as those costs can be considered as incurred wholly and exclusively for the purposes of the trade. He will not be allowed a deduction for the legal costs incurred in defending the defamation case against him. In respect of the Frisbee trade, the pre-trading market research costs will be allowed in computing the corporation tax liability.
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