Revenue Offers Employers Opportunity to Correct Worker Classification Errors Without Penalties

Revenue has announced a time-limited opportunity for employers to regularise payroll tax issues for 2024 and 2025 arising from genuine classification errors, without the imposition of interest or penalties. This initiative is aimed at employers who, acting in good faith and based on the legal guidance available prior to the Supreme Court decision in Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza, may have misclassified employees as self-employed contractors.

The Supreme Court judgment introduced a new five-step framework for determining employment status for income tax purposes. This framework has significant implications across all sectors and is not limited to the specific facts of the Karshan case.

In response, Revenue previously advised all businesses engaging contractors or other self-employed workers to “urgently and comprehensively” review their workforce arrangements. To support this review, Revenue published detailed guidance in May 2024, outlining the five-step framework and providing practical examples to assist employers in applying the new classification criteria. Revenue, the Department of Social Protection and the Workplace Relations Commission subsequently published a Code of Practice on Determining Employment Status in October 2024. The emphasis of this publication was to further support those engaging with contractors to apply the test and complete the analysis. The practical steps to go about actually re-classifying contractors were not addressed.

Revenue acknowledges that the Karshan case represents a shift in the understanding of employment status. In recognition of this, Revenue is inviting employers impacted by the judgment to make a voluntary disclosure in respect of 2024 and 2025.

Revenue has published further guidance to assist employers in calculating any necessary adjustments. This is set out in the Tax and Duty Manual titled Settlement arrangement arising from Revenue v Karshan (Midlands) Ltd t/a Domino’s Pizza, which outlines how any adjustments to income tax, USC, or PRSI liabilities in relation to 2024 and 2025 will be treated as “technical adjustments” under the Code of Practice for Revenue Compliance Interventions.

Employers are strongly encouraged by Revenue to take advantage of this opportunity to review their workforce models and ensure compliance with the updated legal framework.

Key points for employers:

• Revenue is offering a disclosure opportunity for employers who may have misclassified workers as self-employed in 2024 and 2025 in light of the five-step decision-making framework outlined in their published guidance on foot of the Supreme Court judgement in Karshan.
• If employers want to operate this in 2024, Revenue are proposing that communications are sent to contractors telling them not to pay and file their tax returns with the same income.
• The disclosure will be treated as a “technical adjustment” under the Code of Practice for Revenue Compliance Interventions – no penalty applies and no interest will arise.
• Deadline for submission of the disclosure is 30^th January 2026
• Employees may benefit from significant tax savings under the Karshan disclosure opportunity, paying a flat rate of 23.5% instead of up to 48% if taxed as a higher-rate taxpayer.
• Re-grossing risk - if an employer does not avail of the opportunity and those liabilities subsequently come to light, re-grossing legislation will be applied as well as the relevant interest and penalties.

Key questions to determine contractor risk

As the timeline is short to make these disclosures EY and EY Law recommend that any affected employer asks the following questions:

• Contractor Classification Risk - do you engage contractors who may, under Revenue’s five-step framework, be more appropriately classified as employees?
• Understanding the One-Time Opportunity – have you considered the favourable settlement terms of availing of the disclosure opportunity and the potential tax and legal risk of not  disclosing by 31 January 2026?
• Communication with contractors – do you have a centralised database of relevant contact points for those contractors who worked for you in 2024 and 2025?
• Employment Law Implications – if contractors are reclassified, are you prepared for potential employment law consequences that will immediately flow from this decision– by way of example - holiday pay/pension entitlements and other statutory benefits as well as potentially breaching headcount restrictions or other strategic planning projects?

Why act now?

Making a disclosure under Revenue’s current settlement arrangement offers a more favourable outcome—helping employers avoid the potentially significant costs of re-grossing payments, as well as interest and penalties that could apply in the event of a future Revenue Compliance Intervention which would encompass all employment tax risks and would not just be limited to contractors.

EY & EY Law’s View

Revenue’s current settlement arrangement will lead to significant changes in the contractor landscape. It is critical for businesses to consider the impact this settlement arrangement may have on its workforce model.  Performing an impact assessment will also allow businesses to proactively identify and avail of significantly mitigated tax liabilities.

However, this is not just a tax risk that needs to be addressed.  There are very clear employment law risks that may arise from reclassifying the contractors as employees for PAYE purposes.

We recommend starting this process now to ensure your business is in a position to assess the potential tax and legal risk and meet the 30th January 2026 deadline.

EY Team

EY & EY Law’s bespoke team—combine their expertise and practical experience across Tax Controversy, Employment Tax, and Employment Law. We are uniquely positioned to support your business in navigating the evolving contractor landscape and responding to the implications of the Karshan case. With a strong track record in advising on complex workforce arrangements, managing Revenue compliance interventions, and defending classification decisions under scrutiny, our teams help clients proactively assess risk, implement defensible compliance strategies, and prepare for potential tax, legal and regulatory challenges. We work closely with clients to ensure readiness for future audits, litigation, or employment law claims, while maximising the benefits of Revenue’s current settlement arrangement.

Contacts

If you require further information, please call your regular contact in EY or EY Law or contact any of the following:

• Sandra Brennan
• Rachel Dillon
• Deirdre Malone
• Michael Rooney
• Sarah Connellan