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High Court directs URA on collecting PAYE tax
A general view of the Uganda Revenue Authority (URA) headquarters in Kampala. PHOTO/FILE/COURTESY
What you need to know:
- The court set aside the prior decision by the Tax Appeals Tribunal, which had supported URA’s classification of consultants as employees.
The Commercial Division of the High Court has ruled that the practice of the Uganda Revenue Authority (URA) classifying anyone who receives a fixed fee for more than a period of two months as an employee, is wrong.
Justice Thomas Ocaya of the Commercial Division clarified that consultants hired by a company should not pay Pay As You Earn (PAYE) tax. The landmark decision of the court arose out of a protracted legal battle between the Infectious Diseases Institute (IDI) and URA.
Core to the legal contention was whether consultants who are hired by the IDI qualify to be called employees.
“I agree with the submissions of counsel for the appellant (IDI) that the respondent (URA) essentially classified these contracts even in light of the glaring evidence to the contrary for purposes of perhaps enhancing their tax collection efforts which this court should not allow, as there is no tax due and the court will not allow an improper collection of tax against a taxpayer,” ruled Justice Ocaya on October 25.
He added: “Accordingly, and with the greatest respect of the learned members of the Tax Appeals Tribunal, I cannot find a legal or jurisprudential basis for the assertion that any person who receives a fixed or ascertainable remuneration for a period over two months is to be considered an employee. A professional service provider such as a chef, advocate, medical doctor etc may have their retainer paid in regular monthly instalments, which by itself does not make them employees.”
The judge highlighted key distinctions between consultancy contracts and employment contracts, noting that, unlike employees, contractors are not entitled to benefits such as annual leave, fixed working hours, sick leave. Contractors are paid based on work delivered, unlike employees who earn while on leave or holidays.
IDI, in its appeal, claimed it co-opts specialists to provide specialised support on research projects and such specialists are hired on more than one project at a time. It further stated that the said consultants are retained as independent consultants on projects to support specific projects as disclosed in their consultancy agreements and continue to serve on those projects unless donors suspend funding or the subject of the project is complete.
URA had classified the said consultants as employees of the IDI before assessing their Pay as You Earn (PAYE) from their payments, a scenario that the Tax Appeals Tribunal had earlier upheld in the initial legal battle.
“The decision of the Tax Appeals Tribunal to the contrary is set aside and substituted with the present decision of this court. The appellant is awarded costs in the Tax Appeals Tribunal and in this court,” held Justice Ocaya.
DI argued that the tax body was wrong in considering the element of fixed and ascertainable income only and disregarded the other customary tests such as control and the terms of the contract. In his analysis, the judge agreed with the arguments made by the lawyers of the IDI that not every control amounts to employment. “It appears to me that the only control that the appellant exercises, from the materials on record of appeal, is contractual; that is ensuring that the consultants deliver what has been contractually agreed to be delivered rather than overarching control in the employment sense,” he observed.
“It is, therefore, clear to me that the appellant (IDI) does not exercise control over the consultants in the employment sense,” he added. The IDI had in its case before the court contented that in 2012, URA conducted a tax compliance audit resulting in an assessment of more than Shs1.9b which comprised withholding tax of more than Shs150m and PAYE of Shs1.7b. It further contended that the assessments were based on URA’s regard for consultants, trainers, volunteers, and directors as employees.
But going forward, the judge held that the IDI is not obliged to pay more than Shs185m and any penalties and interest as assessed by the tax body as there is no basis for the same.
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Mr Bruce Musinguzi, a commercial lawyer with Kampala Associated Advocates (KAA), described the court decision as a relief for companies and taxpayers.
“It’s a welcome ruling, especially for companies and taxpayers since URA had always insisted on them paying PAYE, a move that had made it very expensive to hire contractors,” Mr Musinguzi said last evening in a telephone interview.
He continued: “URA has been considering them as employees, and remember many of those guys are not under their control but the court is now saying that person (the consultant), is an independent person, hence no need to account for Pay As You Earn. On the side of the contractor, he/she will be paying taxes as an independent person like the corporation tax, and not pay PAYE which had hit their bottom line.”
About PAYE
Pay As You Earn (PAYE) is a tax deducted from employees’ monthly salaries or wages by employers, who then remit it to the Uganda Revenue Authority (URA).
This tax is levied on income earned by individuals from employment, including wages, salaries, bonuses, and allowances. The PAYE system ensures that income tax is collected progressively, based on income levels. Higher earners pay a higher percentage of tax.
