Irish Dental Association

Advice Sheet – Engaging Associates

21 July 2012

Contents

1.Outline2

2.Executive Summary3

3Self employed status5

4Financial arrangements12

5Revenue Appeals 13

  1. Outline

A major feature of being an associate is the possibility of being regarded as self-employed for tax purposes. However self-employed status is not guaranteed and there is no blanket wide approach adopted by the Revenue Commissioners in Ireland which states that all associates are self-employed.

In brief where an associate wishes to operate under a self-employed contract, the associate should always make independent professional judgements and take full clinical responsibility for their work. The practice owner may control the facilities offered but should not control the associate’s day to day work. Where associates are employees, they generally work only for the practice owner on the specific days and time set down by the practice owner and they generally have less financial risk than their self-employed counterparts.

It is important to be aware that Revenue is investigating this area in great detail and this will continue throughout 2012. It is pertinent that where self-employed status is adopted that associates are comfortable that this is the correct position should they ever be investigated by Revenue.

Furthermore not all associates will adopt the same position and depending on the circumstances some will be regarded as operating under a contract for services while others will be found to have a contract of services. The facts of each individual case should determine the tax treatment.

The purpose of this document is to highlight the importance of adhering to the IDA’s model contract and to provide guidance on same. The notes provided below are linked to the content of the model contract.

This document also discusses the difference between the tax treatment for associates who are regarded as self-employed and those that are regarded as employees. It is of critical importance that where a self-employed position is adopted by an associate that a written agreement and certain other mechanisms are put in place to ensure that such a position can be supported in the event of a Revenue investigation. Examples of such practical mechanisms are detailed in this document and should be adhered to carefully by both practice owner and associate.

In the event that Revenue, through an investigation, determines that an associate is an employee of the practice, the practice owner may be required to pay employers’ PRSI at the current rate of 10.75% to Revenue on the gross monies paid to an associate. It has been stated by Revenue in our correspondence with them that they may seek to backdate such PRSI to 1 January 2012. Findings such as these could therefore result in a significant cost for practice owners particularly if Revenue also apply interest to the under payments of the employers’ PRSI.

  1. Executive Summary

The tax position of associates is an area attracting increasing attention from the Revenue Commissioners. The issue is whether anassociate is regarded as operatingunder a contract of service (an employee) or a contract for service (i.e.self-employed independent contractor).

If the associate is regarded as having a contract of service then the employer must deduct employment taxes (PAYE/PRSI/USC) from their remuneration and pay employers PRSI (10.75% of gross remuneration) to Revenue.

If the associate is regarded as having a contract for service then they are responsible for looking after their own tax affairs and no taxes are deducted when payments are made to them.

The risk for practice owners is that if a contract of service is found to exist between a practitioner and an associate, the Revenue can seek to collect from the practitioner the employment taxes that should have been deducted along with employers PRSI of 10.75% which is a significant cost to associates. Furthermore Revenue is seeking to apply such taxes from 1 January 2012. It is important to note that the cost of the employers PRSI will be borne by the practice owner.

In many instances, an independent contractor arrangement will exist; however there are key operational aspects that should be adopted by practice owners and associates to ensure that where such a contract exists that it stands up in the event that it is ever scrutinised by Revenue. A number of the key operational activities are as follows:

  1. A written agreement should be put in place between the practice owner and the associate. This is of paramount importance as if no such agreement is in place, the relationship between the practice owner and the associate could be mistaken for an employer and employee relationship.
  1. Where an independent contractor relationship exists, an appropriate fee sharing arrangement should be put in place between the practice owner and the associate. A suggested fee sharing structure provided for in Part 5 and Section 6 (d) of the contract would be to deduct laboratory fees from the income collected by the associate from the patient and split the balance of income between the practice owner and associate equally. There is no provision for invoicing arrangements between the practice owner and associate in the model independent contractor contract.
  1. The associate should keep a record of all business or other fees paid to them and patients attended while they are in attendance at the practice and should keep monthly accounts detailing same. Such accounts should be available to the practice owner to verify any payments to be shared. Details can be found in Section 6 (d) of the contract.
  1. All payments and correspondence should be made using the practice address. This is provided for in Section 8 of the contract.
  1. It would be advisable to have a separate credit card/laser machine for the associate to receive payments for their fees from their patients. The cost of purchasing and operating the separate machines should be borne by the practice owner and the associate separately. If it is not practically possible to have separate machines, an undertaking should be agreed which recognises that the practice is operating a credit card/ laser machine to handle receipt of payments for all appropriate parties and that appropriate apportionment of income will be arranged at a regular interval to ensure all payments appropriate to the associate are processed promptly.
  1. The associate should have a separate business bank account (independent of his or hers’ personal account) into which his or her share of the fees are paid.By agreement the practice owner could be a joint signatory to this account where this is necessary from a practical perspective.Alternatively, a joint account could be opened by the practice owner and the associate. Where it is the case that all income is paid into the bank account of the practice owner, the income must be clearly identified as income of both the associate and the practice owner.
  1. The associate should be exposed to financial risk. Therefore the associate should have to bear the cost of making good failed treatments performed by them. Details are provided in Section 6 (i) of the contract.
  1. The associate should provide his or her own professional indemnity insurance cover.
  1. The associate should control the hours of work that they undertake although it is expected that the practice owner can state which days the associate will be present in the practice for. This is detailed in Section 4 of the contract.
  1. The associate should only treat his or her patients and should not attend to any of the practice owners patients unless there is a requirement to do so on behalf of the practice owner. This is detailed in Section 6 (e) of the contract.
  1. In the event that the associate is unable to attend the practice on a particular day, the associate should be free to provide a locum to carry out his or her work. Section 6 (o) of the contract details same.
  1. It is important that the associate is free to provide services to other practices at the same time as the existing practice. Agreement can be sought however on days attending the existing practice.
  1. The practice owner can provide chair side and can make available reception staff to the associate (the cost of which can be reflected in the associates share of the fees). This is noted in Section 5 of the IDA’s model of contract.
  1. For convenience, the practice owner can make available to the associate the equipment of the practice. Section 4 of the contract details same.
  1. Income tax returns should be filed by the associate by the relevant date showing details of profits made. Evidence should be provided to the practice owner as soon as possible thereafter. The associate may be required to register for income tax.

3. Implications of self-employed status

3.1.1TAX IMPLICATIONS & ADMINISTRATION

For an associate, a significant feature of being a self-employed independent contractor is that income tax is paid differently. It is not deducted at source by the dental practice but is paid later under income tax ‘Schedule D’ and it is possible to claim tax allowances for certain legitimate expenses.

A Form 11 income tax return must be filed by an associate by the 31stof October following the year of assessment (or mid-November where payments are made using the Revenue Online System (ROS)) and the associate must comply with preliminary income tax obligations for each year of assessment.

Preliminary income tax payments must be made by 31 October/mid November before the end of the tax year for which they must be paid. For example, preliminary income tax for the 2012 income tax year must be paid by 31 October 2012. Such a payment must be at least equal to 100% of the income tax liability for 2011 or 90% of the estimated liability for 2012. Alternatively the payment can amount to 105% of the 2010 liability where the payment is made by direct debit. It is important that adequate preliminary income tax is paid by the associate. Failure to do so will result in Revenue applying interest to the underpayment.

New associates must remember to save up for their tax liabilities and to complete their income tax return accurately. Even with the relatively simple tax affairs of an associate, it is advisable to employ an accountant to ensure that they are in order.

Another consideration for the practice owner isthat where a self-employed contract exists, the practice owner will not be liable for employer’s PRSI contributions, the current rate being 10.75% and will also not need to withhold PAYE and employee PRSI from payments to associates.

3.1.2EMPLOYMENT LAW / TERMINATION

In employment law, the practice owner’srelationship with the contractor is governed by the terms of the contract and employment legislation will not apply as the contractor is not an employee. Rules on protection from unfair dismissal, which provide job security to employees, do not apply to associates who are independent contractors. A practice can decide at any time to dispense with an associate, whether or not a replacement is found, and the only obligation it has is to follow the agreed notice period.

Nor is there any right to Statutory Sick Pay. Associates should take out appropriate sicknessand accident insurance to cover themselves if they are unable to work.

In contrast, where a contract of service is considered to be in place the employer must deduct employment taxes (PAYE/PRSI/USC) from their remuneration and pay employers PRSI (10.75% of gross remuneration) to Revenue. The employer is responsible for PAYE administration; the employee is not responsible for filing an annual tax return (unless the employee is in receipt of other non-employment income) and is entitled to a PAYE tax credit of €1,650 per annum.

3.1.3EQUALITIES AND DISCRIMINATION LEGISLATION

Employment equality legislation will not apply to independent contractor associates who are not employees however the Equal Status Acts will apply. The Equal Status Acts 2000 - 2008 prohibit discrimination on the following grounds: gender, marital status, sexual orientation, religion, family status, age, race or membership of the traveller community or disability.

3.1.4DISPUTE RESOLUTION

In circumstances where an independent self employed associate is not subject to a grievance or disciplinary procedure which would apply to practice employees it is important that there is a means for dealing with disputes when they arise and an effective dispute resolution mechanism should be set out in writing. Such dispute resolution mechanism provides for an informal means of resolving disputes initially and this may be escalated to a formal arbitration if initial attempts to resolve differences prove unsuccessful.

3.2ESTABLISHING SELF-EMPLOYED STATUS

Self-employed status for independent contractors cannot be taken for granted. To an outside observer, such as a Revenue tax inspector, the arrangement may look like that of employer and employee. Therefore it is vital to have a written agreement defining the self-employed nature of the associateship so that it cannot be mistaken for a contract of employment and it is critical that the manner in which the relationship operates is as a contractor and not an employment relationship (regardless of the label the parties apply to the relationship)

3.2.1Written contracts

The written contract should state that the associate is self-employed and that the associate is paying the practice owner for the use of the facilities. However, it is not enough for an agreement simply to declare that the associate is not an employee. In the event of a legal dispute a court or employment tribunal would decide whether or not the associate was an employee by looking at the extent to which the practice owner exercised control over the associate’s work or working practices.

Both parties need to be stringent in observing the day to day aspects of self-employed status. Just because Revenue may accept it for income tax purposes, does not rule out the possibility that an employment tribunal may find that someone is an employee for employment law purposes, or vice versa.

The contract needs to provide clinical freedom for the self employed associate. The associate should alsobe able to offer private care and chose which laboratory to use. However, they would beobliged to make full use of the facilities, including sending in a locum if they are ill or absent for another reason. They could also be asked to promote the interests of the practice.

Self-employed status could be compromised if the contract or actually daily working practices are too prescriptive. Associates should not be told which treatments to provide, which materials to use or which laboratory to use.

It is therefore important that a detailed written contract is put in place which is as sound as possible.

Associates in particular are advised to be very wary of any agreements which are not based on the IDA’s model and to check that those which appear at first sight to be based on our model do not lack vital safeguards.

There are a number of key factors in determining whether a contract of service (employee) or a contract for service (self-employed independent contractor) exists.

3.2.2Criteria indicating that an associate is a self-employed independent contractor

While all of the following factors may notapply, an associate wouldnormally be a self-employed independent contractor if he or she:

  • Owns his or her own business.
  • Is exposed to financial risk, by havingto bear the cost of making good faultyor substandard work carried out under the contract.
  • Assumes responsibility for investmentand management in the enterprise.
  • Has the opportunity to profit fromsound management in the schedulingand performance of engagements andtasks.
  • Costs and agrees a price for the job.
  • Provides his or her own insurancecover e.g. public liability cover, etc.
  • Controls the hours of work infulfilling the job obligations.
  • Has control over what is done, how itis done, when and where it is done andwhether he or she does it personally.
  • Is free to hire other people, on his orher terms, to do the work which hasbeen agreed to be undertaken.
  • Can provide the same services tomore than one person or business atthe same time.
  • Provides the materials for the job.
  • Provides equipment and machinerynecessary for the job, other than thesmall tools of the trade or equipmentwhich in an overall context would notbe an indicator of a person inbusiness on their own account.
  • Has a fixed place of business wherematerials equipment etc. can bestored.

Additional factors to be considered:

  • Generally an associate should satisfythe self-employed guidelines above,otherwise he or she will normally bean employee.
  • The fact that an associate hasregistered for self-assessment under the principles ofself-assessment does notautomatically mean that he or she isself-employed.
  • It should be noted that an associatewho is a self-employed contractorin one job is not necessarilyself-employed in the next job. It isalso possible to be employed andself-employed at the same time indifferent jobs.

The above guidelines are provided by Revenue in their Code of Practice for Determining Employment or Self- Employment Status of Individuals. Each case however has to be decided on the facts and circumstances surrounding it. It is not sufficient for both parties to agree that somebody is self-employed to establish that the contract is a contract of self-employment.

3.2.3Criteria indicating that an associate is an employee

An associate would normally be an employee if he or she:

  • Is under the control of another person who directs as to how, when and where the work is to be carried out.
  • Supplies labour only.
  • Receives a fixed hourly/weekly/monthly wage.
  • Is not exposed to personal financial risk in carrying out the work.
  • Cannot sub-contract the work. If thework can be subcontracted and paidon by the person subcontracting thework, the employer/employeerelationship may simply be transferredon.
  • Works set hours or a given number ofhours per week or month.
  • Works for one person or for one business.
  • Receives expense payments tocover subsistence and/or travelexpenses.
  • Is entitled to extra pay or time offfor overtime.
  • Does not supply materials for the job.
  • Does not assume any responsibility forinvestment and management in thebusiness.
  • Does not have the opportunity toprofit from sound management in thescheduling of engagements or in theperformance of tasks arising from the engagements.
  • Does not provide equipment otherthan the small tools of the trade. Theprovision of tools or equipment mightnot have a significant bearing oncoming to a conclusion thatemployment status may beappropriate having regard to all thecircumstances of a particular case.

Additional factors to be considered: