Introductory Paragraphs: Genesis and Background of the Case

This case arose from a dispute between Everret Aviation Limited and the Kenya Revenue Authority (KRA) regarding the classification of freelance pilots—both resident and non-resident—for purposes of income taxation. Everret Aviation, a provider of helicopter charter services, occasionally engaged freelance pilots for specialized tasks such as evacuations and filming. In 2003, KRA issued a PAYE assessment of KES 6,699,425 covering the years 2000–2002, asserting that freelance pilots were employees and therefore subject to PAYE.

Everret disputed the assessment, claiming the pilots were independent contractors. The Income Tax Local Committee held on 2 April 2009 that PAYE applied to resident freelance pilots and withholding tax to non-resident freelance pilots. Dissatisfied with this decision, Everret appealed to the High Court under Section 86(2) of the Income Tax Act.

Background of the Case – Key Points

1. Service Structure: Everret provided various aviation services and hired freelance pilots—some resident, others non-resident—for short-term specialized missions.
2. KRA Assessment: On 24 March 2003, KRA demanded PAYE for pilot remuneration from 2000 to 2002, classifying payments as salary income.
3. Local Committee Ruling: Decided on 2 April 2009 that PAYE was applicable to resident pilots, and withholding tax to non-resident pilots.
4. Appeal to High Court: Everret challenged the PAYE liability on resident freelance pilots, arguing they were not employees.

Appellant’s Submissions (Everret Aviation Ltd)

1. Not Employees: Argued freelance pilots were subcontracted for specific, short-term assignments and not integrated into the company.
2. No Control or Management: Claimed it had no authority to discipline or supervise the freelance pilots beyond assigning tasks.
3. Skill-Based Engagements: Pilots were hired for their specialized skills, often flying under unique circumstances such as external load operations.
4. No Monthly Wage: Emphasized that the freelancers were not on a regular wage bill and did not receive benefits typical of employees.
5. Contracts of Service vs. for Services: Maintained that the arrangements were contracts for services, not of service.
6. Rule 14 Limitation: Highlighted that the Local Committee had no basis for distinguishing between resident and non-resident freelancers offering similar services.

Respondent’s Submissions (KRA)

1. Contracts of Service: Claimed that both resident and non-resident freelance pilots were engaged under contracts of service, subjecting them to PAYE.
2. Direct Engagement: Argued that Everret paid the pilots directly for services rendered and had control over assignment and compensation.
3. Section 3(2)(a)(ii) of the ITA: Asserted that the pilots’ income constituted gains from employment or services rendered, thus taxable.
4. Legal Obligation to Deduct PAYE: Cited Section 37 of the ITA, placing a statutory duty on Everret to withhold and remit PAYE.
5. PAYE Rules Applicable: Emphasized that even freelance engagements qualified as emoluments under PAYE rules.
6. Freelancers Were Part of the Business: Claimed the pilots’ work was integral to Everret’s operations, making them de facto employees.

Court’s Decision – Key Points

1. Freelancers Were Employees: Held that the freelance resident pilots were engaged under contracts of service and qualified as employees.
2. Integration Test Applied: Noted that pilots’ roles were integral to Everret’s core business; thus, they were not independent contractors.
3. Control and Remuneration: Concluded that Everret exercised significant control over assignments, terms, and payments—hallmarks of employment.
4. Statutory Interpretation: Reiterated that Section 3(2)(a)(ii) and Section 37 of the ITA clearly support the PAYE obligation for such arrangements.
5. Appeal Dismissed: The Court dismissed the appeal, upholding the Local Committee’s decision.
6. Costs Awarded: Costs awarded to KRA.