Peter Sanderson, Head of Litigation at Benedek Lewin Limited, looks at the radical changes to payroll tax in the 2018 budget:
- Major detrimental impact on unincorporated businesses;
- Treatment of shareholders;
- Disabled employees
The Payroll Tax Amendment Act 2018 has brought in some radical changes to how tax is treated. It has scrapped the concept of ‘notional remuneration’ and replaced it with a tax on actual remuneration “for services rendered by the employee or deemed employee”. Remuneration includes any scheme or arrangement under which a person in any way whatsoever shares his employer’s profit, including by way of dividend. However, for self- employed persons, there is no reference to services rendered, and so tax would appear to apply to all remuneration.
What is caught by the amendments?
Directors, officers and shareholders of a company are deemed to be employees of a company, and so will be required to pay payroll tax on any sums received, that can be said to be in respect of services rendered to the company.
The net has been so widely cast now that even businesses that were not traditionally viewed as being caught by Payroll Tax, such as the operation of a rental property, may now be liable for payroll tax according to how the law is written.
Even overseas business interests are caught by the Payroll Tax Act, if carried on outside Bermuda from a place in Bermuda. A person in Bermuda running a business remotely may be liable to pay payroll tax on income received.
The Payroll Tax amendments impact particularly harshly on unincorporated sole traders, who are now required to pay tax on all remuneration. Sole traders earning at least moderate sums ought to strongly consider incorporating so as to pay tax only on income for services rendered rather than on all remuneration.
Companies could also consider putting in place procedures so as to clearly demarcate what income is in respect of services rendered, so as to make it easier to justify if ever challenged by the Tax Commissioner.
There may also be other arrangements that can be put in place to minimise tax liability. This is a matter that must be considered carefully, to avoid falling afoul of anti-avoidance or evasion provisions. We can advise further if required.
It is important that employers get this right, as directors and officers of a company (including the corporate secretary) are jointly and severally liable for any taxes owed by the company.
Another amendment is tax relief for disabled employees. Disability has been defined in the Act as a functional impairment, whether physical, intellectual, neurological, psychiatric or sensory, that limits or prevents the carrying out of normal day to day activities. A disabled person must be in possession of a medical certificate confirming that the disability impacts the person’s ability to find or retain suitable employment.
Disabilities could include common conditions such as diabetes or obesity (if causing impairment).
The Act does not give further clarification on how severe a limitation must be, or how far the disability must impact an ability to find employment. A minimal measure of limitation or impact may be sufficient to qualify, as long as the disability is bona fide.
Challenging tax decisions
We anticipate an increase in tax disputes as a result of these amendments – both on remuneration and disability issues. In the event that a person is dissatisfied with a decision of the Tax Commissioner, there is a right of appeal within 30 days to the Tax Appeal Tribunal. It is important to get the grounds of appeal right, as the appeal is limited to the grounds stated in the objection. A natural person may represent themselves before a tribunal, but an incorporated entity will need to be represented by an attorney. There can be a further appeal on points of law to the Supreme Court.
Lodging an appeal does not relieve any tax obligation in the meantime.
Benedek Lewin Limited is able to assist with any questions you may have regarding this:
Dispute resolution – Peter Sanderson, firstname.lastname@example.org, 299-7057
Corporate, incorporations and trusts – Simon Benedek, email@example.com, 296-2896
This article is not intended to be relied on as legal advice.