Locum Doctors are not employees for Tax purposes

Case Study:Kenya Hospital Association v Commissioner of Domestic Taxes (Tax Appeal 1146 of 2022) [2024] KETAT 649 (KLR) (26 April 2024) (Judgment)

KRA conducted an audit on the tax returns of KHA. After audit KRA issued KHA additional assessments for Withholding tax, VAT and PAYE for the periods 2015 to 2020 totaling to Kshs. 862,732,072.00.

KHA objected to the additional assessment amounting to Kshs. 862,732,072 on 27th June 2022.

KRA issued its objection decision on 25th August 2022 partially allowing the objection, allowing Kshs. 114,082,911 and confirming Kshs. 748,649,162.00.

Among the issues  in  dispute was the treatment of  payments to locum doctors.

With regard to the demand of PAYE on engagement of locum doctors KHA noted that KRA failed to examine the elements of the relationship between KHA and the locum doctors relying on the basis of the legal precedents adduced by KHA which set out the tests relied on by courts in determining whether a person has been engaged as an employee or as an independent contractor and which conclusively established that the locum doctors engaged by KHA were not employees of KHA as they were not integrated to the Hospital operated by KHA, they work under minimal control of KHA and they do not derive any benefits of employment such as leave days, NSSF and  NHIF payments from their engagement.

KHA further noted that KRA incorrectly determined that the payments made to locum doctors were subject to PAYE at thirty per cent (30%) yet KHA demonstrated that the locum doctors were independent contractors whose remuneration was paid based on invoices raised by the doctors and subjected to Withholding tax by KHA at the rate of five per cent (5%) which KHA duly withheld and remitted to KRA.

KHA submitted that in terms of how the locums work, the specialist doctors have full control of how, when and the manner in which they work without KHA having any control over them as they are specialized doctors.

That Appellant further averred that as evidenced by the contracts signed by the locums, KHA does not pay for the licensing or certification of the said doctors but the same is procured individually by them.

KHA postulated that as relates to payment of specialist doctors including the radiologist and pathologists, their payments were based on the number of times they attended to their duties at the specialized departments. That moreover, and so as to ensure that the said specialists are available on call, a specific retainer is normally paid to some of the specialists so as to create an obligation to attend to calls for services from the Hospital any time a need arose. This meant that when they are called by the Hospital, they are available to interpret the reports as generated.

  In its ruling on 26/04/2024, the TAT observed that:

• The locum doctors were not entitled to whatever benefits that accrue to the employees of KHA including payments for NSSF, NHIF, leave days and holidays.
• The mode of payment of locum doctors is by way of invoicing. That the invoices are issued by the locum doctors to KHA for quantifiable services rendered based either on hours worked per month or based on reports interpreted.
• The consideration that the locum doctors get for the services rendered is not a standard amount and is not remitted via KHA’s payroll but just like any other supplier of services to KHA, they are paid based on objectives met and time spent in the work i.e. hours that they worked or the magnitude of tasks undertaken in terms of clients of KHA attended to by the locum doctors.
• The number of hours the locum doctors take up roles at the Hospital, are duly issue invoices to KHA like any other supplier of a professional services.
• The Iocum doctors were not integrated as part of KHA like the other doctors who are employees and that locums were treated purely as Consultants.
• Considering the locum doctors are subject to minimal control by KHA and are engaged without integration with KHA unlike an ordinary employee. These doctors are not engaged as employees of KHA but are consultant
• The contracts between KHA and the locum doctors clearly stipulate that the engagement is that of a consultancy agreement. As such, from the inception of the engagement between the parties, it is very clear between them it KRA are in consultancy agreement and any rights or obligations that accrue from an employment relationship were not available to them.
• The locum doctors have retained their own indemnity policies which contrasts with the nature of engagement of employees retained by KHA. Unlike for the locum doctors, KHA caters for the indemnity of doctors who are its employees.
• The test in Everret  Vs KRA case is a four-pronged approach which should be applied holistically and requires the existence of:

(a)Mutuality of obligations.

(b)Integration of the activities of the contractor and the business activities, that is, whether the person’s work is the primary business of KHA?

(c)Control of the employer; and

(d)Economic or business reality which considers whether the worker is in business on his or her own account, as an entrepreneur, or works for another person as an employee

As such, the locum doctors are independent contractors and therefore not subject to payment of PAYE.

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