What is IR35 and what does it do?
In simple terms IR35 (also known as the intermediaries legislation) ensures that, if the relationship between an individual worker and a client would have been one of employment had it not been for an intermediary, the engagement is a ‘relevant engagement’ and the individual will be subject to tax and national insurance contributions (NIC) as if they were an employee of the client.
For a locum, the intermediary would usually be their own personal service company (PSC) but it could also be a partnership or as an individual.
This really means that tax and NIC is collected in respect of individuals working for organisations who would be classed as employees, were it not for the fact their services are provided through the intermediary.
The rules are applied individually to each engagement. The rules for deciding whether an engagement would be one of employment or self-employment are complex – please see later in article where we summarise some of the main factors taken into account when considering whether a locum is employed or self-employed.
So what has changed recently, if anything?
The below summarises the position depending on whether you are classed as a small business using locums, a locum operating through a limited company, a locum operating as a sole trader or a veterinary organisation classed as a medium/large business.
You are defined as a small business if you meet two of the following criteria:
- Turnover no more than £10.2 million per annum (exc. VAT)
- Gross assets (i.e. ignoring liabilities) on the balance sheet of no more than £5.1 million
- No more than 50 employees
I am a veterinary practice classed as a small business (using locums).
In this instance, where locums are providing services to you through a limited company, the onus will continue to be on their intermediary (i.e. the agency, umbrella company or the limited company that they operate through) to determine their employment status and if the rules apply.
If HMRC successfully argued that any of your locums, operating through limited companies, should actually be treated as employees and therefore employer’s NIC was due on their remuneration, it would be the intermediary (i.e. the agency, umbrella company or the locum’s limited company) who is responsible for paying this not you.
If you have locums that provide services to you on a self-employed basis i.e. not through a limited company, umbrella company or an agency, the practice would be responsible for determining employment status and paying the PAYE, employee’s NIC and employer’s NIC due if HMRC successfully argued that they should be treated as an employee. It is possible there may also be a potential claim for holiday pay, sick pay and pension contributions but this is a consideration for legal advisors, as we are not qualified to advise on this as accountants.
Please see below to help determine if someone should be treated as employed or self-employed for tax purposes.
You should also ensure that locums are providing you with invoices for all work done. We strongly recommend there is also a contract in place which sets out the way in which the locum works to clearly set them apart from being an ‘employee’
I am a locum operating through a limited company.
If you provide locum services to a medium or large business, e.g. one of the corporates, you may now find they are insisting that:
- you become an employee and are paid through their payroll on a zero hours contract
- you operate through one of their approved umbrella companies whereby the umbrella company is responsible for deducting PAYE and NICs through its payroll, or
- you operate via one of their approved agencies whereby you are an employee of the agency and the agency is responsible for deducting PAYE and NICs through its own payroll.
This is because from 6 April 2021 the onus has shifted to medium and large businesses to determine and be responsible for the employment status of their contractors operating through intermediaries e.g. locums.
Where you are providing services to a medium or large businesses, you should receive a ‘Status Determination Statement’ (SDS) from the end client (the medium or large business), confirming their assessment of your employment status. This statement should also include details of the reasons behind that decision.
If you do not agree with the SDS, it is possible to appeal to the end client but not to any other independent party. The appeal must be made within 45 days from the date the SDS was received and must:
- Refer to the SDS that you are in disagreement with
- Provide reasons as to why you disagree
- Keep records of any disagreements raised.
The client will then have 45 days to respond to the appeal. During that time any payments made will be based on the original determination. Ultimately it is up to the end-user to make the determination though, and so if your appeal is unsuccessful there is no further process to appeal.
If you have not received an SDS, you can request confirmation of the size of the end client to satisfy that they are small and therefore are not required to provide. The end client has 45 days to confirm their size to you.
It is worth bearing in mind, there are some benefits that would come with being an employee, e.g. holiday pay, sick pay, employer pension contributions etc. Also, if you work solely for medium or large businesses you may find yourself in a position where you in fact no longer require a limited company from which to trade, saving you those admin fees.
Please note you would not have the added benefits of being an employee if you continued to work through your PSC and are deemed to be within the scope of IR35. You would only receive those benefits if you are formally employed.
If you work for small companies, you are unlikely to see a change although some practices may choose to adopt the above approach anyway.
If you work for a mix of small, medium and large businesses you may still operate through a limited company for your work for small businesses. In this case, as mentioned above, the onus will continue to be on your intermediary (i.e. the agency or the limited company that you operate through) to determine your employment status and if the rules apply.
If HMRC successfully argued that you, operating through a limited company (where your services are used by a small business), should actually be treated as an employee, and therefore employer’s NIC was due on your remuneration, it would be the intermediary (i.e. the agency or your limited company) who is responsible for paying this. Please see below to help determine if you should be operating as employed or self-employed for tax purposes.
You should ensure that you are providing invoices for all work done. We strongly recommend you also have a contract in place which sets out the way in which you work which should clearly set you apart from being an ‘employee’.
I am a locum operating as a sole trader:
Although the rules have not changed for locums operating as sole traders, you may find that, if you work for a medium or large business, e.g. one of the corporates, you may now be treated in the same way as ‘I am a locum operating through a limited company’.
If you are providing services to a veterinary practice classed as a small business, as was the case previously, the practice would be responsible for paying the PAYE, employee’s NIC and employer’s NIC due if HMRC successfully argued that you should be treated as an employee.
Please see below to help determine if you should be operating as employed or self-employed for tax purposes.
If you work for a mix of small, medium and large businesses you may end up being self-employed for your work for small businesses and employed for work done for medium or large businesses. In this case you will still need to submit a self-assessment tax return which will incorporate all your earnings.
As is the case for locums operating through limited companies, you should also ensure that you are providing invoices for all work done. We strongly recommend you have a contract in place which sets out the way in which you work which should clearly set you apart from being an ‘employee’.
I am a medium or larger sized veterinary organisation (using locums):
From 6 April 2021 (delayed from 6 April 2020) rules for private sector medium and large private sector organisations (based on the Companies Act definition) will broadly follow those introduced for the public sector in 2017. This new legislation shifts the responsibility for determining the employment status of contracts, e.g. locums, onto the end client, e.g. vet corporate groups.
For all locums/contractors operating through a limited company or as a sole trader you will be required to:
- Make a ‘Status Determination Statement’ (SDS) for each contractor
- Pass on the SDS to the contractor in writing, along with the reasons for the assessment
- Respond to any employment status disputes within 45 days
- Where PSCs are deemed to fall within the off payroll working rules, the entity that pays the PSC (which could be your business or an agency) will be responsible for deducting income tax and NICs from payments made to them.
What should you do now?
It is important that you review all your engagements with your contractors now to avoid costly tax implications and potentially penalties if you were to be found to be in contravention of the rules. Failure to comply with the rules may result in the worker’s tax and NICs liability becoming the responsibility of your business.
It is important to note that it is not just about what your contracts say but the working practices in place too. Every engagement must be considered on its own merits and a determination made accordingly.
All locums should be issued with a Status Determination Statement.
What to do if your contractor is within the scope of IR35?
The simplest solution is to engage the individual as an employee. Many businesses may be reluctant to take this step, as there would be additional costs to consider, such as pensions auto-enrolment and holiday pay. You can continue to engage with their limited company, but if your company is the entity paying the limited company, or via an agency, then you would be responsible for ensuring PAYE and NIC are deducted from the payments made to them via RTI. A new starter form is required to add them to the payroll and they should be identified as an off payroll worker by a simple tick box.
General indicators of employment v self-employment
Further to the above, we have summarised some of the main factors taken into account when considering whether a locum is employed, or self-employed.
Indicators of employment
If the answer to all of the following is ‘Yes’ the worker is probably an employee:
- Do they have to do the work themselves?
- Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
- Do they work a set number of hours?
- Can someone move them from task to task?
- Are they paid by the hour, week or month?
- Can they get overtime pay or bonus payments?
Indications of self-employment
If the answer to all of the following is ‘Yes’ the worker is probably self-employed:
- Can they hire someone to do the work or engage helpers at their own expense?
- Do they risk their own money?
- Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves?
- Do they agree to do a job for a fixed price regardless of how long the job may take?
- Can they decide what work to do, how and when to do the work and where to provide the services?
- Do they regularly work for a number of different people?
- Do they have to correct unsatisfactory work in their own time and at their own expense?
In some scenarios you will not have been able to answer ‘Yes’ to all of the questions in a particular section. It is then important to look at the overall picture including the following:
- If the locum’s contract provides an opportunity for them to provide a substitute to carry out the work, then this is an indication of self-employment.
- Does the locum control the what, where, when, how? This is again an indication of self-employment.
- Does the locum employ others? This is the most persuasive indicators of self-employment.
- The greater financial risk the locum has taken, the more likely that they are self-employed, e.g. buying their own assets, paying overheads, buying their own materials.
- Length of engagement – the longer the engagement, then the stronger the indication of employment.
- Is the locum ‘part and parcel of the organisation’? This is an indication of employment.
- The HMRC website includes an online questionnaire; the CEST (Check Employment Status of Tax) Tool, which aims to give HMRC’s view as to whether a worker is employed or self-employed. HMRC have agreed to be bound by the CEST outcome, provided that accurate answers are given to the questions. You should therefore print and retain the result screen, showing the 14-digit reference number, and the enquiry details screen. You can access it here. Where there is a dispute between the end user and the contractor, we would recommend that both parties complete the questions on the CEST and use this as a starting point for discussion.
Happy to help
If you have any questions on the above specific to your personal circumstances, please do not hesitate to get in touch with your usually contact in the Hazlewoods Veterinary Team. We are very happy to help you.