At the turn of the century IR35 legislation was introduced to tackle alleged problems of abuse by individuals. These difficulties mainly boiled down to contractors obtaining the benefits associated with running a limited company as well as those received from the end client under their employee benefits; contractors operating under a Personal Service Company (PSC) were utilising a tax loophole that meant PAYE and NI tax was not being paid at source and it was left to the PSC to consider, at the end of the tax year, whether any engagement was a ‘deemed employment’ and so attracted further tax and NI liabilities.
As a result last year’s budget included the announcement that public authorities, which include GP practices, would no longer be able to pay contractors via a PSC without tax deductions at source if the end-client deems the contract to fall within IR35. Prior to this month’s legislation changes, the decision regarding IR35 rules was in the locum’s hands; the new off-payroll working rules mean the decision now lies with the GP practice offering the contract.
This is important because it means locums who operate via a PSC could find they are subjected to deduction of employment taxes at source if the practice determines IR35 rules do apply, because 32% (20% basic tax rate and 12% NI contributions) must be deducted from payment to the locum’s PSC and paid directly to HMRC. The practice in this situation will bear the additional cost of employer’s NI contributions at 13.8%.
For payroll systems locums are no longer classed as an employee but are, instead, part of a new category called ‘off-payroll worker’, in order to facilitate the deduction of tax at source. All payments made after 5 April 2017, regardless of when the work was completed or when the relevant contract was entered into, come under the new legislation.
What should a GP practice look for when considering whether a locum is inside or outside IR35?
HMRC has recently released a status tool to help GP practices and other public authorities in deciding whether a locum is caught by IR35. This can be accessed using the following link: https://www.gov.uk/guidance/check-employment-status-for-tax. Relevant factors pointing to the IR35 rules applying include whether the locum:
- Has to work at the GP practice
- Uses the practice’s equipment
- Is required to work specific shift patterns and
- Is in charge of leading a team or part of one.
Whether there is a right of substitution – the ability of a contractor to send someone else in their place to complete a role – within the contract between the practice and the PSC will be of particular importance. If there is such a right, the locum will, most likely, fall outside IR35 being instead deemed to be self-employed.
It is important to remember that the IR35 deemed employment rules themselves haven’t changed, only the responsibility for making the decision – it now falls with the GP practice, rather than the locum.
Nonetheless, the changes impact any locums who are currently not paid via PAYE. If locums want to ensure they continue to receive their expected level of income without deduction of employment taxes they should make sure they are working as self-employed consultants. This can be aided through ensuring written contracts are in place and that they contain appropriate substitution clauses.