A GROWING number of people in Hong Kong are switching from a ''contract of services'' to a ''contract for services'' to minimise their tax liabilities, but what is the difference between the two? Broadly, a contract of services is a contract of employment and is therefore subject to salaries tax. Once it has been established that a person is subject to salaries tax, his or her income from their work in Hong Kong will be subject to tax at progressive tax rates but partly offset by eligible tax relief on such items as donations, qualified outgoings and expenses as well as personal allowances. A contract for services is a completely different animal. It refers to an agreement between one party (say agent) and another party (say principle) for the performance of a certain job or assignment, usually on a project-by-project basis. In this regard, the agent is carrying on a business in Hong Kong and derives income therefrom. As such, the income from the ''contract for services'' will be subject to profits tax charged on business income at the standard rate (for unincorporated bodies) or at a tax rate specified by the Government after deducting any expenses and outgoings incurred during the basis period in the production of chargeable profits. Except in special circumstances, it is easier for a person to obtain expense deductions for profits tax purposes than for salaries tax purposes, and thus less net income will be chargeable to profits tax than to salaries tax. Technically, we can distinguish between ''contract of service'' and ''contract for services''. But in practice, it is difficult to draw a hard and fast line between them. In determining these taxpayer relationships it appears that the Inland Revenue Department relies on three tests: the control test, organisation test and economic reality test. The control test assesses if a boss has the power of control over his servant in determining when and how the job should be performed and in what manner. If this power over the taxpayer's performance exists, this is a clear indication that there is a ''Master and Servant'' relationship. To pass the organisation test, the services of a self-employed agent should be independent from the business of his principle. However if the services of the agent in substance form an integral part of his principle's business and the capacity of the agent is part and parcel of the organisation structure of the principle, it is difficult to show the agent is carrying on an independent and separate business. So the agent is defined as an employee of the organisation. The economic reality test examines the agent's business. For a person to be in business, he must be fully equipped. He would acquire his own equipment, hire his own helpers, assume a certain degree of financial risk and undertake a certain degree of responsibility for his management, etc. Without all those prerequisites, there is no reasonable or commercial justification believing that the person is carrying on a business. Minor points of consideration include: whether the person has obtained a Business Registration Certificate for his business? How and in what way is the amount paid by the boss reported in the Employer's Return? Is he entitled to any paid leave or other staff benefits from his boss? Will any protection from the Employment Ordinance be applicable to him? As the subject is not simple and straightforward, one should consult a tax adviser before implementing any arrangement that could result in you falling into the wrong tax category.