The Kenyan law clearly distinguishes between an employee (contract of service) and an independent contractor (contract for service). Section 2 of the Income Tax Act, a “contract of service” implies an employer-employee relationship, while a “contract for service” denotes an independent contractor arrangement.
A contract of service is one that creates rights and responsibilities between parties to an employment relationship, whereas a contract for service implies that a person is self-employed where the work is under their own terms, as against a person who is employed and is under specified terms with legal protection and defined remuneration.
Case study; Kenya Hospital Association Vs Commissioner of Domestic Taxes TAT Appeal No. 1146 of 2022
At the core of this case, the tribunal sought to determine whether the locum doctors—medical practitioners hired on a temporary basis by the Kenya Hospital Association were liable to pay PAYE as submitted by KRA.
Case Study Analysis
Kenya Hospital Association Case
- Kenya Hospital Association submitted that the locum doctors would be engaged solely based on their availability.
- Kenya Hospital Association averred that the allocation of when a locum doctor would be in the Hospital would solely be based on their availability at the specific time that they select on the duty rota and they would have the discretion of cancelling their availability.
- Kenya Hospital Association further noted that specific timelines are solely based on the availability of said specialists within the referenced time.
- Kenya Hospital Association submitted, the specialist doctors have full control of how, when and the manner in which they work without having any control over them as they are specialized doctors.
- Kenya Hospital Association further mentioned that as per the contracts signed by the locums, Kenya Hospital Association does not pay for the licensing of the doctors but the same is procured individually by them.
KRA’s Case
- KRA submitted that Kenya Hospital Association wrongfully deducted withholding tax at 5% for Locum doctors’ contracts that the KRA found to be a contract of service hence assessed the PAYE.
- KRA stated that the contract of the Clerk of works and Locum Doctors were found to be a contract of service as defined under Section 2 of the Income Tax Act.
Tribunal’s Decision
- The Tribunal noted that the locum doctors were not entitled to whatever benefits that accrue to Kenya Hospital Association employees such as payments for NSSF, NHIF, etc.
- The Tribunal additionally noted that the mode of payment adopted by locum doctors is by way of invoicing Kenya Hospital Association. Invoicing (not payroll) and variable compensation indicated contractor status.
- The Tribunal noted that the compensation that the locum doctors get for the services rendered is not a standard amount.
- The Tribunal found that the consideration to the locum doctors is not remitted from Kenya Hospital Association’s payroll but just like any other supplier of services.
- The Tribunal noted that the Iocum doctors were not integrated as doctors who are employees and that they were treated purely as consultants.
- This meant that the doctors are not engaged as employees of Kenya Hospital Association but as consultants.
- The Tribunal noted that the contracts between the Kenya Hospital Association and the locum doctors clearly stipulate that the engagement is that of a consultancy agreement.
- The Tribunal further noted that the locum doctors retained their own indemnity policies that differs with the nature of engagement of employees retained by the Appellant.
- The Tribunal was persuaded that the locum doctors were independent contractors and therefore not subject to payment of PAYE.
Conclusion
- Employers and employees need to have a wide spectrum of knowledge and understanding of labour and employment laws before engaging in employment agreements.
- Employers need to have clear and concise contracts that distinguish between consultancy and employment.
- Individuals under employment contracts are liable to being charged PAYE on the compensation they receive as per the various tax bands while consultants are charged withholding tax on the compensation they receive.
Recommendation
- Navigating the nuances of employment and labour law, especially in employment and consultancy contracts require specialized knowledge and professional advisory.
- At Intelpoint Consulting, our professional tax advisory services offer solutions to manage and mitigate risks associated with employment and labour laws.