The Supreme Court on tax where employment was concealed

(Ruling of the Supreme Court of the Russian Federation, No. 309-ЭС24-20306)

• An individual entrepreneur engaged self-employed persons to do the work, but the tax authority concluded that these were in fact concealed employment relationships.

As a result, the individual entrepreneur, as tax agent, was charged a penalty under Article 123 of the Tax Code for failure to perform the duties of a tax agent, and personal income tax was additionally assessed on the sums he paid to the self-employed persons.

The courts concluded that, because the self-employed persons had already paid tax on the income they received, the personal income tax additionally assessed on the entrepreneur, and the amount of the penalty, should both be reduced by that tax.

The Supreme Court agreed with the tax authority that the amount of the penalty is not to be reduced. On the arrears of personal income tax, however, the Supreme Court took an approach that is new in principle:

1. The tax authority must tell every self-employed person whom the taxpayer engaged about the tax claims that have arisen.

2. The self-employed persons may then either have the tax they paid refunded to themselves, or consent to that tax being taken into account when the arrears of the taxpayer under audit are calculated.

The tax authorities are uncovering concealed employment more and more often, so this position of the Supreme Court matters a great deal.

The Court drew a parallel with the splitting of a business. Where a business has been split, the tax paid by those who took part in the splitting scheme must be taken into account automatically when additional assessments are raised against the person who benefits from the scheme.

As the Court stated, however, the position of self-employed persons is fundamentally different. A tax reconstruction (that is, setting the tax they have paid against the arrears of personal income tax) is possible only with the consent of the self-employed persons themselves, because they are entitled to deal with the overpayment in another way, for example by having it refunded.

One thing is encouraging. This ruling of the Supreme Court does still leave open a chance of a tax reconstruction where the tax authorities uncover concealed employment. Andrey Rymarev, head of the tax practice at Consul Group, comments.

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