Court rules against URA’s classification of consultants as employees

In a significant ruling, the Commercial Division of the High Court declared that the Uganda Revenue Authority’s (URA) classification of individuals receiving fixed fees for over two months as employees is incorrect. This decision concludes a protracted legal battle between the Infectious Diseases Institute (IDI) and URA.

Justice Thomas Ocaya NOTED that professionals—such as chefs or doctors—may receive regular payments without automatically being classified as employees. In a decisive statement, he remarked, “There is no tax due, and the court will not allow improper tax collection against a taxpayer.”

The judge rejected URA’s stance that receiving fixed fees for more than two months qualifies a worker as an employee. He outlined that contractors, unlike employees, lack benefits like annual leave, fixed working hours, and sick leave, and are paid for project-based work rather than ongoing salaried employment.

The IDI argued that it hires specialized consultants for specific projects, with contracts spanning until project completion or suspension due to funding issues. Previously, URA had classified these consultants as employees, imposing Pay As You Earn (PAYE) taxes on their payments. Justice Ocaya’s ruling overturned this classification in favor of IDI’s appeal.

Case Background

URA’s assessment had burdened the IDI with over UGX 1.9 billion in taxes, including withholding tax and PAYE. However, the court ruled that IDI should only pay UGX 185 million, refuting the additional tax demands.

Understanding PAYE

Pay As You Earn (PAYE) is a tax deducted by employers from employees’ salaries, covering income from wages, bonuses, and allowances. It’s a progressive system where tax rates increase with income, aimed at fair tax collection.