Disclosure Opportunity To Regularise Misclassification Of Self-Employment

Introduction

On 11 September 2025 the Revenue Commissioners issued a press release announcing an opportunity for businesses to correct payroll tax issues for 2024 and 2025 arising from the bona fide misclassification of workers. Businesses that acted in good faith, relying on the case law and guidance available prior to the Supreme Court judgment in Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino's Pizza [2023] IESC 24 ("Karshan"), but that may have misclassified employees as contractors are encouraged by Revenue to take this opportunity to regularise their tax affairs.

Employers will be permitted to enter into settlement terms in respect of the relevant payroll tax issues, without imposition of interest or penalties, where they engage with Revenue before Friday, 30 January 2026, on the issue. Any necessary adjustment to income tax, USC or PRSI liabilities due in respect of 2024 and 2025 will be treated as a "technical adjustment" under the Code of Practice for Revenue Compliance Interventions.

In conjunction with this announcement, Revenue has published "Revenue Guidelines: Settlement Arrangement Arising from Revenue v Karshan (Midlands) Ltd. Trading as Domino's Pizza" ("the Settlement Guidelines").

Revenue's Reaction to Karshan Case

Revenue previously issued a press release on 27 October 2023, after the publication of the Karshan judgment a week earlier, in which it encouraged businesses, and any agents representing them, that were engaging contractors, sub-contractors or other workers on a self-employed basis to familiarise themselves with the detail of the judgment and to review their workforce model in light of same. Where a business considered that it may have previously misclassified a worker as self-employed, rather than as an employee, and wished to regularise its position, it was advised to do so in accordance with section 2 of Revenue's Code of Practice for Revenue Compliance Interventions ("the Code").

In May 2024, to assist businesses in carrying out this review, Revenue published detailed guidance for determining employment status for taxation purposes (Tax and Duty Manual Part 05-01-30) and set out a number of practical examples to assist businesses determine the taxation status of workers that they engage.

In October 2024 to assist with the application of the test in Karshan, Revenue, the Department of Social Protection and the Workplace Relations Commission jointly published the Code of Practice on Determining Employment Status. The publication was a joint initiative because, although the question of employment status in Karshan was determined in the context of tax treatment by Revenue, it is intended that the test would also be consistently applied by the Department of Social Protection and in the Workplace Relations Commission, subject to differences in legislative frameworks. That being said, it cannot be assumed that a decision by Revenue, the Department of Social Protection or the Workplace Relations Commission will necessarily be followed by the others.

It may be reasonable to conclude that the press release of 27 October 2023 and the subsequent publication of guidance did not result in the level of self-review by businesses, and related disclosures, that Revenue had anticipated. For this reason a more structured and incentivised opportunity is now being afforded to businesses to review the status of workers engaged by them and regularise the tax position for 2024 and 2025.

I would recommend that any agent advising a client business on the features and merits of this disclosure opportunity listen to episode 23 of the ITI's TaxTalk podcast, from 17 October 2025. As part of the podcast, host Donal O'Donovan spoke with Sarah Waters (Revenue's Accountant General's and Strategic Planning Office), Sinéad McNamara (Revenue's Personal Tax Policy and Legislation Division) and Aidan Lucey (PwC). In providing some context for affording taxpayers this disclosure opportunity, Revenue accepted that there may have been a degree of confusion surrounding this issue and that businesses may have experienced difficulties in regularising their payrolls in the two years since the Karshan decision. Revenue is now offering this settlement arrangement for businesses, which have acted in good faith, to regularise their payroll in a standardised way.

How Did We Get Here?

The Karshan judgment clarified the area of law relating to employment status and whether a worker is a contractor or an employee. The case was an appeal taken by Revenue of a Court of Appeal decision that found delivery drivers for Karshan to be independent contractors rather than employees, overturning the original decision of the Tax Appeals Commission.

The Supreme Court reassessed the importance of mutuality of obligation, previously considered a cornerstone of the employment relationship, as now being one factor to be considered in the overall assessment of the contractual relationship. Instead, it should be viewed as doing no more than describing the consideration that has to be present before a working arrangement is capable of being categorised as an employment contract.

The decision reaffirms the position as set out by the Supreme Court in Henry Denny & Sons (Ireland) Ltd v Minister for Social Welfare [1997] IESC 9 and confirms that the factors, which have developed in case law over 50 years, are still of relevance and should be used as guidance in determining employment status. A holistic assessment of the actual relationship between the parties is still required.

To be clear, the Karshan decision did not introduce new principles but, rather, clarified the test that existed pursuant to previous case law. In this respect, Murray J stated "the method I have proposed is no more than a reduction of the existing case law"

Five-Question Framework

The court set out a five-question framework to guide any assessment of employment status, but this is not to be considered a legal test per se. Murray J said that it was useful to identify "factors that will be usually be relevant to the inquiry".

Question 1 – Remuneration and contract type

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

The first question that must be asked is whether the relationship is one of labour in exchange for payment. In furtherance of this question, the contract type must be identified and fall into one of the following categories:

• a contract for a regular wage for work with ongoing obligations to pay and work,
• a series of employment agreements governing the discharge of particular tasks,
• an agreement to complete one identified task,
• an ongoing agreement defined by an umbrella contract,
• any combination of the above, or
• is the agreement one for the exchange of labour for pay at all?

Question 2 – Personal services

If the contractual relationship for labour has been established, then the next factor to be considered is whether it is one in which the worker is agreeing to provide their own services, and not those of a third party. The court found that personal service is a requirement and not merely a factor. Although some degree of substitution is permissible, such as where the worker is unable to carry out work, it must be consistent with personal performance to be an employment relationship. Any significant qualification placed on substitutes or discretion to refuse any proposed substitutes is more consistent with an employment relationship.

Question 3 – Control

This question relates to the party deciding the who, what, where, when, how, as follows:

• who determines the way in which the work is to be done,
• what work is required to be done,
• where the work is to be done,
• when the work is to be done and
• how the work is to be done.

The question is whether the business imposes control over the worker such as working hours, location of work and methods of completing the work. In most employment situations the employer has residual authority over how work is done. However, independent contractors usually retain autonomy in deciding the method, and this is often linked to completing the task in the most efficient manner, to the satisfaction of the other party, to maximise the return for the contractor. Therefore, it is often difficult to look at control without looking at whether the contractor is carrying on business on their own account.

Murray J also commented that the level of control is often determined by how integral the work carried out is to the business.

Question 4 – Working arrangement

It is only if Questions 1 to 3 are answered in the affirmative that this question needs to be considered. This question requires the evaluation of the actual dealings between the parties and the working arrangements in practice, rather than the label placed on them. Important here is the contractor's ability to make a profit from their own skills and the need for investment on the part of the contractor, particularly in terms of tools and equipment used to carry out the work. Which party drafted the agreement and whether it was negotiated will be also important. The tax affairs of the contractor are of relevance but only marginally, according to Murray J.

Question 5 – Legislation

This question relates to the specific piece of legislation in which the employment status is being determined, for example, any difference in the definition of employee, employer and contract of services under the relevant piece of legislation.

The first three questions are to be viewed as a filter. If any of these are answered negatively, there cannot be a contract of employment. If the first three questions are answered affirmatively, Questions 4 and 5 must then be considered to determine whether a contract of employment exists. It is interesting to note that the test was employed in the decision of the Tax Appeals Commission in 148TACD2024, where the Commissioner considered that the evidence before him suggested that none of the three above steps had been met in respect of the appellant in that case.

Findings

In finding in favour of Revenue, the Supreme Court overturned the Court of Appeal decision and found that the Karshan drivers were employees. However, the court was keen to stress the limited application of this decision and warned against its broad application to delivery drivers and workers in the "gig economy". Any determination of employment status will still depend on the facts of the individual case. In fact, the court only went as far as determining that the Karshan delivery drivers were employees for taxation status only and that employment status, for the purposes of employment laws, would have to be determined in the relevant forum.

Making the Disclosure

In respect of the years 2024 and 2025, where an employer identifies that there has been a misclassification of an employee as a "contractor", an unprompted disclosure of the misclassification can be made in accordance with the Settlement Guidelines, via ROS, to Revenue. Revenue has stated that a disclosure under the Settlement Guidelines is not a disclosure under the framework set out in the Code.

For the purposes of the settlement, the Settlement Guidelines note that employees will be treated as if they have been paid "gross" by the employer, without deduction of income tax, USC or PRSI. The employer will be required to calculate the applicable income tax, USC and PRSI liabilities for the impacted employee, to be submitted as part of the disclosure. In circumstances where a business is not in a position to discharge the relevant liability, an application for a phased payment arrangement can be submitted to Revenue.

The Settlement Guidelines provide guidance on calculating the settlement figure (due for submission by 30 January 2026) and note:

• Income tax is to be calculated at the standard rate of 20% on the gross amount paid to the employee during the relevant year. The provisions of s968A TCA 1997 in respect of re-grossing of payments made without deduction of income tax should therefore not apply (see Revenue's Tax and Duty Manual Part 42-04-06).
• USC is to be levied at a "blended rate" of 3.5% on the gross amount paid.
• PRSI is to be calculated on an actual basis.
• Credit will be available for income tax paid by the employee through the selfassessment system in respect of 2024, where an individual has already filed a return for 2024.
• Settlement for 2025 is required before the self-assessment deadline for that year. This means that there may be no "credit" for tax paid through the self-assessment system by employees available to employers that are availing of these settlement terms. Credit will, however, be available for any relevant payments of preliminary income tax.

Revenue has advised that the misclassification and resulting tax issues will be treated as a "technical adjustment", and no penalties, either tax-geared or fixed, will apply.

In respect of PRSI, the employer will also be required to create a PRSI record for the impacted employee for 2024 and 2025. Guidance on creation of the PRSI record is provided in the Settlement Guidelines.

In the author's opinion, the standardised approach set out in the Settlement Guidelines represents a real opportunity for businesses to address classification issues for the years 2024 and 2025 in a pragmatic and costefficient manner.

Preliminary Work

As an initial step in the decision-making process about whether a business intends to avail of the disclosure opportunity, it will be necessary to review all aspects of the relationship between the business and the individuals concerned. This exercise should be carried out using the guidance issued by Revenue after the publication of the Karshan decision.

Once a decision is made to avail of the opportunity, a business will then need to engage with the individual or individuals concerned. To maximise the potential credits that might be available, a business should seek to establish whether the individual has:

• filed their personal tax returns and paid income tax/USC and PRSI in respect of 2024 and 2025,
• suffered withholding tax, such as PSWT or RCT, on payments and
• charged VAT on invoices that have been raised.

Revenue has stated that it wishes only to "collect tax once", in which case all available credits should be claimed, and such claims will be considered on a case-by-case basis. Where VAT has been charged by an individual on invoices raised for services provided to a business that is entitled to full VAT recovery, no adjustment may be required. However, if the activities carried on by the business are wholly or partially exempt from VAT, it may be necessary for credit notes to be issued etc.

When communicating with relevant individuals, businesses should also consider the non-tax issues arising from a potential change in status from that of a self-employed contractor to employee.

What Are the Implications from an Employment Law Perspective?

When revising the characterisation of workers from a tax perspective, businesses should also consider the implications of characterising workers as employees from an employment law perspective. Although the Karshan decision was a Revenue decision, the intention is that the Workplace Relations Commission would apply the same test, subject to any differences in the legislative frameworks. This means that, as a general rule, businesses would take a uniform approach to the characterisation of workers from both a tax and an employment perspective.

Practically, if employers re-characterise contractors as employees, they should consider implications for workers' employee entitlements during the period of engagement, such as minimum wages, annual leave, sick leave and notice period, as well as maximum working week, breaks, redundancy pay and protections pursuant to the unfair dismissal jurisdiction. All of these entitlements will necessarily be determined by reference to workers' period of continuous service, which will generally be from when they first commenced work (unless there was a significant shift in the way they have been engaged). Employers may also consider whether it is appropriate to issue relevant workers with a new contract that accurately reflects the employment relationship.

Re-characterisation is likely to raise some complex technical issues for retrospective employee entitlements – for example, where a worker was absent on occasions because they were unfit for work when they may have been entitled to sick leave as an employee, or where a worker was previously absent owing to being a parent when they may have been entitled to parental leave as an employee.

Some careful strategic thinking should be applied to rectify issues associated with mischaracterisation from an employment law perspective – in particular, where issues of mischaracterisation are far-reaching or apply to workers who are no longer in the employ of the business.

Significance of the Deadline

Where an employer fails to take this opportunity to review its workforce practices and to avail of the settlement option by the 30 January 2026 deadline in respect of any tax implications arising from a misclassification of workers for 2024 and/or 2025, this will be treated as a complete failure to operate fiduciary taxes by Revenue, resulting in tax, interest and penalties applying in accordance with the Code. Regrossing will also apply in these circumstances.

What About Tax Issues for Periods Before 2024?

Section 2 of the Settlement Guidelines states:

However, when asked a question in episode 23 of the ITI's TaxTalk about the implications for pre-2024 periods, Revenue replied that where bona fide classification errors were made by businesses, Revenue would not seek to open earlier years. The implications for earlier years would therefore seem to depend on the extent to which businesses acted in good faith, which by its nature is quite a subjective test.

To the extent that they have not already been made subject to a compliance review by Revenue on the issue, an employer who identifies employment classification issues arising before 2024 should still have an opportunity to submit an unprompted qualifying disclosure to Revenue. Although an unprompted qualifying disclosure will not provide the total relief from penalties offered under the settlement terms, it may result in a significant reduction of the applicable penalties when coupled with the full cooperation of the employer in the matter.

Conclusion

In framing the Settlement Guidelines, Revenue has provided a genuine incentive to businesses to review and regularise employment classification issues for 2024 and 2025. By applying the standard rate of tax to the gross payment and a blended rate of USC, allowing credits for tax paid and not seeking to collect interest or penalties, Revenue has certainly taken a practical approach. However, the broader implications of a change in classification would need to be considered carefully. The timeline in which to avail of the disclosure opportunity is tight, so any business considering the option would need to act quickly!

This article first appeared in Irish Tax Review Issue 4 (2025) © Irish Tax Institute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.