David Burt, in his recent Budget Statement, has announced plans to crack down on payroll tax abuse. The Premier gave the example of a partner in a law or accounting firm who might declare a notional salary of $200,000 but actually earn $1 million from their business.

The Premier said that employers would be required to declare all income paid to employees, whether as wages or as dividends or otherwise.

I can anticipate that this will lead to disputes between the Office of the Tax Commissioner and employers as to the correct amount of tax to be paid.

For shareholders who provide services to the company, whether as employees or directors, the Payroll Tax Act says that they should be taxed on an amount that represents a fair and equitable valuation of their services to the business. This is not a tax on dividends generally.

A shareholder’s dividends might, and often will, exceed the value of the shareholder’s services to the business, especially if the business is doing well. Tax issues will arise, though, if the Tax Commissioner forms the view that an employer has been under-reporting income of shareholders.

The Tax Commissioner can normally go back up to two years when investigating an employer, although this may be extended if there has been fraudulent conduct by the employer.

An employer who is aggrieved by a decision of the Tax Commissioner can appeal to the Tax Appeal Tribunal, but this does not stop the obligation to pay the tax while the appeal is being considered. Companies might also consider ways to structure their business so as to minimise payroll tax liabilities.

Another interesting payroll announcement is that employers will receive a concession for disabled employees. It remains to be seen how this will be applied, but I note that the Human Rights Act includes diabetes as a disability. Given the prevalence of diabetes in Bermuda, there may be a drive by employers to declare employees disabled to reduce payroll tax liability. This could result in a pay increase or greater employment opportunities for disabled employees. If the Tax Commissioner does not accept that an employee is disabled, these cases could end up before the Tax Appeal Tribunal.

• Peter Sanderson is the Head of Litigation at Benedek Lewin Ltd, whose practice includes tax liability issues