The use of outsourcing companies for the provision of manpower needs of organisations has experienced steady rise in Nigeria. It is also becoming increasingly fashionable for companies to engage independent (individual) contractors to provide specialised services under what is commonly termed "contract for service" as against the usual practice of having direct employees who are seen to be under "contract of service". Some of the reasons offered by organisations for outsourcing the workforce include cost control, access to specialised expertise and the need to focus on the core business activities of the organisation.
The two concepts - "contract of service" and "contract for service" may appear closely related and sometimes interchangeably used by undiscerning employers, there are deep technical legal analysis that will be required to separate the two. The debate over contracts of service and contracts for service has a long history in employment law. Generally, a contract of service is an employee-employer relationship, while a contractor-client relationship is a contract for services.
Employees under contract of service are deemed to have employment contract with the organisation which entitle them to employment benefits such as wages and salary, pension, medical insurance and other similar employment benefits. A contract for service, on the other hand, is an agreement whereby an independent, self-employed, individual is contracted to provide a specific service for the organisation in return for a fee. Under the outsourcing arrangement, a third party independent company is engaged to provide services using its personnel for a fee. There is no employer-employee relationship between the organisation and the employees of the contractor or outsourcing company.
In each of these types of contract, both parties have specific rights and responsibilities, which differ according to the types of contract in place. Be that as it may, the focus of this article is to examine the tax compliance impact of these arrangements in terms of the employers' obligations under the pay-as-you-earn (PAYE) that is operational in Nigeria.
Section 81 of the Personal Income Tax Act Cap P8, LFN 2004, as
amended to date (PITA) provides that for employees - under a
contract of service, it is the responsibility of their employers to
deduct and remit income taxes from the emoluments paid to such
employees. Section 82 of PITA provides further that the employer is
answerable to the tax authorities for taxes deducted from the
employees. The employer is required to file annual returns in
respect of emoluments paid to their employees and account for the
withheld and remitted to the relevant tax authorities.
Section 81(2) of PITA requires the employer to file annual returns not later than 31 January of every year in respect of all emoluments paid to its employees in the preceding year. Failure to comply attracts a penalty, upon conviction. Whenever the tax authorities intend to conduct tax audit enquiries in respect of employees' personal income taxes, the employer is usually held answerable.
For individuals working under an outsourcing arrangement, the responsibility to account for their PAYE tax and all matters connected therewith lies with their employer (i.e. the outsourcing company). The triangular relationship created by outsourcing contract often creates bottlenecks during tax audits exercise. The primary goal of the relevant tax authorities is to ensure that appropriate taxes have been withheld and remitted on all emoluments paid to and/or enjoyed by the employees during the relevant period. The focus of the tax authorities' searchlight is therefore often (mis)directed at the company using the services of the outsourced employees rather than the legitimate employer.
Self-employed individuals are personally responsible for their own taxes. Such individuals are expected to file personal income tax returns under the self-assessment regime. However, the company to whom the services are rendered has the responsibility for deducting and remitting withholding taxes on the fees payable under the contract at applicable rate. In the same vein, a self-employed individual has an obligation to register for value added tax (VAT) and charge VAT on invoices issued for services rendered, unless such service is specifically exempt from VAT. The Value Added Tax Act Cap V1 LFN 2004 as amended (VATA) defines a taxable person as an individual or body of individuals, family, corporations sole, trustee or executor or a person who carries out in a place an economic activity, a person exploiting tangible or intangible property for the purpose of obtaining income therefrom by way of trade or business or a person or agency of government acting in that capacity. For the purpose of VATA, an individuals under a contract for service falls under this category.
In addition to the need to account for tax, the Pension Reform Act CAP. P4 LFN 2004 (PRA) mandates employers with five or more employees to make contributions on behalf of their employees into an approved pension fund. As explained earlier, individuals with contracts of service are employees. Hence, pension contributions are mandated for employees but not for individuals with a contract for service. Individual with a contract for service could make voluntary pension contributions into their Retirement Savings Account (RSA).
While the employer's responsibility to account for PAYE is limited to employees engaged by the company, it is important for every organisation to ensure that appropriate records are in place to support its tax position. The onus is on the organisation to ensure that it discharges its civic obligation as an unpaid agent of the Government to deduct and remit PAYE taxes of its employees to the relevant tax authorities. Where the company has an arrangement with an outsourcing company, it will also be helpful to ensure that adequate documentation are obtained from the service provider to support the fact that the outsourcing company is responsible for its employees' tax obligations and that necessary tax returns are indeed being filed with the tax authorities.
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.