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Locums: don’t get caught out by tax rules

Locums working through their own companies, and the practices they work for, need to ensure they are on top of off-payroll working and IR35, says Adam Bernstein.

Off-payroll working rules are intended to ensure that locums and the self-employed, and those they work for, are unable to reduce the taxes they pay by introducing an intermediary into their contractual arrangements.

For example, a practice wishing to take on a locum could choose to engage the individual directly. If classed as an employee for tax purposes, the practice would have to operate pay-as-you-earn (PAYE) and would also be liable for employers’ national insurance contributions (NICs).

Alternatively, it could contract them via a company owned by the locum (often referred to as a personal service company or PSC). In the absence of the off-payroll working/IR35 rules, the locum could end up with a lower tax and NIC bill, and the practice would not need to worry about employer NICs or PAYE.

Which rules?

To tackle such arrangements, the government introduced IR35 more than 20 years ago. Emma Rawson, technical officer at the Association of Taxation Technicians (ATT), explains that under this ‘a contractor has to decide if, ignoring their PSC, they would have been an employee of their client. If they would, the PSC has to account for the appropriate payroll taxes and NICs to HMRC.’

However, following longstanding concerns over the level of non-compliance with IR35, new rules (referred to as off-payroll working) were introduced for the public sector in April 2017 and the private sector in 2021.

Under off-payroll working, Rawson says that the responsibility for deciding whether a contractor should be taxed as an employee is taken out of their hands. Instead, ‘it is up to the client to determine whether the rules apply and ensure that the correct payroll taxes and NICs are deducted from payments made to the PSC’.

Despite the off-payroll working rules applying across both the public and private sectors, IR35 did not disappear.

Rawson says that locums still need to consider IR35 if the end client they are working for is either based wholly overseas or classed as ‘small’. For these purposes, unincorporated clients such as sole traders or partnerships will be small if their turnover does not exceed £10.2m.

Clients that are companies or limited liability partnerships (LLPs) need to meet the Companies Act definition of a small company. This broadly requires any two of the following: their turnover does not exceed £10.2m, their assets do not exceed £5.1m and that they have no more than 50 employees.

When the rules apply

The off-payroll working and IR35 rules work in very similar ways. The key difference is who makes the decision and is responsible for deducting tax and NICs.

Rawson says that, under both regimes, there needs to be an individual worker performing services for a client, services provided through an intermediary and, if the worker was contracted directly by the engager, they would have been regarded for tax purposes as an employee.

‘The first two of these conditions are relatively straightforward, but the third is much trickier,’ says Rawson. ‘In effect, you have to imagine there is a direct contract between the worker and client and consider whether that contract would have been one of employment. If the worker would have been self-employed, then off-payroll working/IR35 do not apply. If they would have been an employee, then they do.’

  1. Check the size of the practice – if it counts as ‘small’, the locum will have to decide on whether IR35 rules apply and make sure PAYE and NICs are considered by their PSC
  2. Locums should carefully check the details of SDSs provided by clients to ensure they are accurate
  3. Practices should have procedures in place for a rapid turnaround should the locum dispute an SDS.

If in doubt, seek expert help – tax law is complicated, and getting it wrong can be costly.

What practices should do

The first thing Rawson recommends that practices should check is whether they qualify as ‘small’. If they are, they have no further obligations and it will be up to the locum to worry about IR35.

But if they are not, she says, ‘they need to carefully check their contracts. If any of these aren’t directly with the individual or an agency, but instead through a PSC or other intermediary, then the off-payroll working rules need to be considered.’

For each contract, the practice needs to consider whether, if the locum was engaged directly, they would be considered an employee for tax purposes. HMRC’s Check Employment Status for Tax tool may help with this.

Rawson says that practices then need to ‘issue a document known as a status determination statement (SDS), setting out whether or not they think the off-payroll working rules apply and their reasons. A copy needs to be given directly to both the individual locum and any agency the practice contracts with for their services. And, if off-payroll working applies, then whoever pays the locum’s PSC will need to operate PAYE and deduct tax and NIC from those payments.

What locums need to do

The advice from Rawson to locums is to check whether the practice is ‘small’. If it is, the locum ‘will have to consider whether IR35 rules apply and ensure their PSC accounts for PAYE and NICs accordingly’. If they are not small, then the locum should receive an SDS from the practice setting out their conclusion as to whether off-payroll working applies and the reasons for this. This should be checked carefully for accuracy.

Rawson says that if the rules do apply ‘payments made to the locum’s PSC will be net of tax and NICs. However, on the plus side, the PSC won’t pay corporation tax, and the locum is free to extract the funds as a dividend or salary without paying any additional tax or NICs’.

If the locum and practice disagree

There’s a risk of a locum disagreeing with the practice’s conclusion. In this instance, Rawson says ‘they can ask it to reconsider. The practice then has 45 days to either uphold their original decision or issue a new SDS.’

Her advice to practices is to ‘have procedures in place to handle such disagreements and turn them around within the deadline, or they will remain liable for deducting tax and NICs’.

And, with a note of caution, she warns: ‘If the locum and practice continue to disagree there is little more that can be done. HMRC will not intervene, and the locum and practice will have to decide whether they wish to continue or walk away from the contract entirely.’

This area of tax law is riddled with mantraps so, if in doubt, good advice is not just necessary – it’s essential.

This article first appeared in Private Dentistry magazine. To receive a copy, sign up to Dentistry Club.

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