In a landmark ruling, the Commercial Division of the High Court has declared that the Uganda Revenue Authority’s (URA) practice of classifying individuals who receive fixed fees for over two months as employees is incorrect.
This decision follows a prolonged legal battle between the Infectious Diseases Institute (IDI) and URA.
Justice Thomas Ocaya emphasized that professional service providers, like chefs or doctors, may receive regular payments without being considered employees.
The court ruled in favor of IDI, stating that the URA improperly classified consultants as employees to enhance tax collection.
He emphasized, “There is no tax due, and the court will not allow improper tax collection against a taxpayer.”
Justice Ocaya rejected the URA’s assertion that receiving fixed remuneration for over two months automatically makes someone an employee.
“A professional service provider, such as a chef or doctor, may receive monthly retainers without being considered an employee,” he clarified.
The judge highlighted key differences between consultancy and employment contracts. Contractors, unlike employees, do not receive benefits like annual leave, fixed working hours, or sick leave.
Contractors are paid based on delivered work, whereas employees earn regardless of work completion.
The IDI had argued that it hires specialists for research projects, often working on multiple projects simultaneously. These consultants are retained as independent contractors, serving on projects until completion or donor funding suspension.
The URA had previously classified these consultants as IDI employees, assessing Pay As You Earn (PAYE) taxes on their payments. However, Justice Ocaya’s ruling overturned this decision, aligning with the IDI’s appeal.
Background of the Case
The IDI had been assessed over Shs1.9b in taxes, including withholding tax and PAYE, based on URA’s classification of consultants as employees. However, the court ruled that the IDI is only required to pay Shs185m, as there’s no basis for the additional taxes.
PAYE Tax Explanation
Pay As You Earn (PAYE) is a tax deducted from employees’ monthly salaries or wages by employers, remitted to the URA. This tax is levied on income earned from employment, including wages, salaries, bonuses, and allowances. The PAYE system ensures progressive income tax collection based on income levels
