IR35 and Employment Status
IR35 is a buzzword at the moment, but what is it and who does it really apply to?
IR35 is a set of legislation potentially affecting those individuals who provide their services through a company, in our case this might be a Locum offering their services through a Limited Company.
However, the publication of the rules is highlighting employment status generally and we should review the position of Locums who might otherwise be considered an employee eg. Locums who only work at one practice but are not salaried there. Historically, most locums and practices have worked on the 6 month rule – assuming that the locum cannot be an employee if they are not there for more than 6 months. Whilst that applies for pensions purposes, it doesn’t necessarily apply for tax.
This means that all practices should look carefully at their contracts for locums to ensure that they are genuinely self-employed.
Those individuals who are genuinely filling in for short-term periods of absence/sickness etc. and working at a variety of practices and with their own control over how they provide the service are likely to be seen as self-employed. It is however looked at on a contract by contract basis – so it is perfectly possible for a locum to be partly salaried and partly self employed.
HMRC have provided an updated Employment Status tool https://www.gov.uk/guidance/check-employment-status-for-tax to enable the practice or the locum to check that they are genuinely self-employed in HMRC’s eyes. If you run this tool and answer the questions for each contract – and it shows you are self-employed – then print out the results and retain them with your paperwork.
Some of the questions are not 100% clear on how they should be answered. For example there is a question about costs incurred: does a doctor’s bag contents count as ‘materials that form a lasting part of the work’ – presumably if contents are used in the course of the work the answer would be yes; or equipment – including ‘high cost’ specialist equipment but not phones/laptops – would your normal equipment be deemed ‘high cost’ (proportionate to what you earn for a session it is – but over the life of the equipment probably not).
You may need to run the status tool more than once with different answers to the grey areas to see what results you get.
If it shows you should be employed – then look at the terms of your agreement to see if you have more scope to remain independent. For example: make sure that you have some sort of signage/documentation so that patients know that you are an independent business helping the practice out; if you can group together with other locums, you might get the practice to agree that you can send a substitute if you can’t do a session you are booked for – paying for help is definitely an indication of self-employment. Make sure the contract is specific for what they want you to do – and that you can’t just be moved around to fill whatever hole they want to fill on the day – without a renegotiation of the contract.
A Locum Doctor who is just an extra pair of hands, providing a service for a practice just like a salaried doctor – when the practice wants, with the practice dictating working times/conditions, what work is to be done, how it is to be done etc. is, for all intents and purposes, seen to be an employee and could be forced on to PAYE for that contract.
If the Locum, on the other hand, determines when and where they will or won’t work, how they carry out their work, can provide (and pay for) a substitute if they are unable to fulfil a session that they have been booked for, and the patients are fully aware that the Locum is running his own business and helping the practice out) – they will likely be seen as being self-employed.
So who does IR35 actually apply to?
Only locums working through companies – and the new public sector rules put the decision on to the practice.
Each contract needs to be looked at to see whether you would be an employee (albeit on a very short term contract) were the company not there. What has changed is that instead of that being your interpretation of the rules (and down to HMRC to challenge you if they do not agree your interpretation), it is now the practice who make that decision – and where it is grey, they are likely to err on the side of safety and apply tax/NIC to your payments such that it may not be worth using the company. However, there may be instances where the practice refuses to employ you direct and you have to keep the company to keep the separation – so you end up in the worst of all worlds with the tax situation of an employee, but outside the NHS pension scheme and no employment protect rights.
If you are already subject to IR35 what has changed?
If you are working in the public sector, then the tax/NIC payable will be greater than that due under IR35 because you will not be permitted a 5% notional expenses deduction. In this situation it may not be worthwhile using the company from a tax point of view.
Where to go from here
- If you’re a self-employed sole trader check your contracts and check HMRC’s status tool, and keep copies of both for your records.
- If you take on a contact as an extra pair of hands in a practice on a long term basis – even if only for one session a week, you are likely to be employed.
- If you are self-employed but the HMRC status tool indicates employment consider the terms of your contract and whether changes can be made.
- If you currently have a company which already operates under IR35, the practices will become responsible for deducting tax and NIC instead of you (Note that if you have some work outside of ‘public sector’ you may still have to operate IR35 yourself on those contracts).
- If you have a company where IR35 has not previously applied, and the practice think the new rules do apply, you will need to review the terms of the contract carefully to see if you can reach an alternative agreement.
In all cases it is best practice to work through the status tool to ensure that the terms of your contract do not take you out of self-employment.
Liz Densley, FCA CTA
Director, Honey Barrett Specialist Medical Accountants
Founder member and secretary of AISMA (Association of Independent Specialist Medical Accountants)
Honey Barrett offer a 10% discount on first year fees to those using LocumOrganiser