New Revenue Guidance - Karshan Disclosure Opportunity

Revenue have published a new Tax and Duty ManualOpens in new window which provides details of an opportunity granted to employers to correct payroll tax issues arising from bona fide errors where employees were misclassified as 'self-employed', without tax-geared penalties, fixed penalties or interest applying. To avail of the settlement terms, which apply in respect of 2024 and 2025, disclosures should be submitted to Revenue no later than Friday 30 January 2026. Employers must either pay the liability to income tax, USC and PRSI (both employee and employer) in full or request, at the time they submit the disclosure, to enter a phased payment arrangement for the liability. Where liabilities are settled by way of a phased payment arrangement, interest is applied over the repayment period.

Revenue's position is that employers are on notice of the approach to employment classification for tax purposes contained in the Supreme Court decision in Revenue v Karshan (Midlands) Ltd. t/a Domino's Pizza (the "Karshan Case"), delivered on 20 October 2023. In the Karshan Case, the Supreme Court found that the delivery drivers of Karshan (t/a Domino's pizza) should be classed as employees, rather than independent contractors. In reaching this decision, the Supreme Court extensively analysed the numerous tests that have been developed in considering whether an employment relationship exists, setting out a five-step framework to be followed.

Following the Karshan Case, Revenue issued guidance for employers which we considered in our Insights article New Irish Revenue Guidance on Determining Employment Status.

The newly published Tax and Duty Manual is clear that the settlement terms do not apply:

• to any intervention which was open prior to 20 October 2023;
• to any individual who, under the Code of Practice on Determining Employment Status in effect prior to October 2023, should have been classified as an employee; or
• to any individual who should have been classified as an employee based on any published decision or determination of the Department of Social Protection, the Workplace Relations Commission, the Tax Appeals Commission or a court.

Where Revenue is of the opinion that the misclassification has arisen from either careless or deliberate behaviour, the full liability to income tax, USC and PRSI (and interest and penalties) will be pursued.

Employers availing of the settlement opportunity outlined in the Tax and Duty Manual should advise employees not to declare income which is included in the disclosure when filing their returns for 2024 and 2025. Where an individual has already filed a return for 2024, a tax credit should be available for tax paid through self-assessment by that individual. Revenue will deal with such instances on a case-by-case basis.

In terms of settlement calculations, Revenue will accept liabilities calculated as follows:

• income tax calculated at the lower rate of 20% on the gross amount paid to the employee during the relevant year;
• USC calculated based on a blended rate of 3.5% of the gross amount paid during the relevant year; and
• PRSI (both employee and employer) must be calculated on an actual basis and records updated.

Of particular note is that the tax does not have to be calculated on a 'grossed-up' basis (as is often required in disclosure scenarios), and the income tax rate referenced is the standard (and not higher) rate of income tax.

The Tax and Duty Manual provides details on some of the more procedural aspects of making the disclosure, including the creation of PRSI records for employees. Following the disclosure, Revenue will notify the taxpayer in writing once the payments have been allocated, PRSI records have been updated, and the case can be closed.

Where liabilities which are not disclosed subsequently come to light, Revenue will form the view that there has been a "complete failure to operate fiduciary taxes and will apply the relevant legislation in relation to the failure to operate PAYE, PRSI and USC", and interest and penalties will apply.

Given the deadline in Revenue's latest guidance, it is now vitally important for any business engaging (currently or historically) contractors, sub-contractors or other workers on a self-employed basis, to examine such arrangements (both now and on an ongoing basis) in light of the five-step framework in order to ensure these individuals have been correctly classified.

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.