The Revenue Commissioners are investigating the growing number of companies set up so their directors can provide services on a contracted basis to third parties.

A pilot study in the southwest that examined 123 cases resulted in the collection of €4.5 million in additional taxes by the end of June last. The project has been extended nationwide and has involved approximately 560 cases, according to a spokeswoman.

The practice has been growing in recent years whereby companies hire people by entering into contracts, either directly or through intermediaries, with service companies whose directors are the people whose services are being hired.

A key motive for the structure is to protect the hiring companies from obligations contained in employment law.

However, the Revenue Commissioners investigation has also established that “in many cases there are deficiencies in accounting for input costs and expenses, with the result that there has been a significant understatement of tax liability to the benefit of the directors,” the spokeswoman said.

A non-Revenue source said the Revenue is believed to have discovered instances where people were being paid more in expenses by their company than they were in taxable income.

The use of these service companies, which usually only provide contracted services to one client, is in part being driven by the desire of US technology multinationals to avoid the obligations of employment law, he said.

When services are provided on a sole trader basis to just one client, the relationship can invoke employee rights. However, this may not be the case with contracts signed with services companies.

The Revenue spokeswoman said the services companies in question do not appear to have a substantial business separate from the contracts, and in most cases the directors are the only employees of the company and pay tax through PAYE.

In a letter to the Irish Tax Institute earlier this year, the Revenue said it has decided to approach the understatements of tax liability by the services companies as deliberate.

Not expressing an opinion
It also said that, at the moment, it was not expressing an opinion as to whether "the company directors should not more properly be regarded as direct employees of the entity awarding the contract. This question is being reviewed and may be addressed in the future."

Ryanair's use of the services company arrangement for its pilots featured in a recent court case in London. The airline said it could not comment as the UK company though which it hires pilots, Brookfield Aviation International Ltd, was appealing the decision. There was no comment available from Brookfield.

The issue of expenses and tax did not feature in the court hearing and there is no suggestion intended that Ryanair, any Ryanair pilot, or any of the companies involved in the supply of contract pilots to the airline, are other than fully compliant in their tax affairs.

One of the Irish accountancy firms involved said the Ryanair scheme was drafted with the approval of the Revenue’s large cases division, which closely monitors the affairs of major taxpayers such as Ryanair.