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For some years, HMRC and its predecessors – HM Customs and Excise, and Inland Revenue – have been bothered by the loss of tax revenue to the Government. So, set against the backdrop of wanting to be a low tax economy, it made sense that HMRC sought whatever it could from the tax regime in place.
One part of the regime is IR35 – a set of tax rules that apply in certain circumstances, namely where a worker provides services to a client/hirer through a personal service company (PSC) or an intermediary; and the working arrangements are such that if the worker provided the services directly, he or she would be regarded for income tax purposes as an employee of the client/hirer.
As far as the law is concerned, a locum providing services to a private business – a practice – through its PSC is likely to fall within this definition.
Mark Stevens, a senior associate solicitor at VWV, explained that the IR35 rules were introduced in 2000. He said: “The Government was looking to reduce tax avoidance through the use of PSCs across all sectors. This was particularly an issue for contractors in the IT sector, where the use of PSCs was very common.”
However, in April 2017 changes to the IR35 regime in the public sector occurred, impacting local authorities and the NHS. The reforms, as Mr Stevens explained, “shifted the responsibility to determine the status of the contractor providing services through their personal service company on to the end user – the public body. This meant that if a contractor was deemed to be inside IR35, the public organisation is required to deduct income tax and national insurance as they would do for employees”. Any failure to follow the rules could make the body liable for any unpaid taxes, interest and penalties – which could be extensive.
The problem for the veterinary profession is that from April 2020, the shift in responsibility rules will also begin to apply to it in the private sector.
From 6 April 2020, within the private sector, the client/hirer will need to decide whether the relationship with the contractor or his or her PSC is genuinely that of client/contractor or is actually one of employer and employee.
And Mr Stevens is very clear on the implications. He said: “The client/hirer will be obliged to take reasonable care when determining the status of the relationship. The contractor will be bound by the decision concerning status made by the client/hirer."
The new off payroll rules will only apply to medium and large private sector organisations from 6 April 2020, but Mr Stevens said smaller private sector organisations would not be subject to the new rules if they had an annual turnover of below £10.2 million, or a balance sheet total of below £5.1 million, and the number of employees did not amount to more than 50.
He added: “If a business is smaller than the thresholds, that does not mean IR35 is not an issue – simply that the shift in responsibility will not apply.”
The point is practices will still have a duty to deduct tax and national insurance if the locum is effectively an employee.
Steps to take now
Noting a warning shot from HMRC, Mr Stevens said the body had said that “where it does not receive the tax due then liability should initially rest with the party that has failed to fulfil its obligations until such time as it does meet those obligations”. The client or hirer, in other words.
But even where businesses – practices – are not caught by the shift in responsibility, he advises those who engage individuals through PSCs to take a number of key steps. He said: “Firstly, businesses should audit their terms and conditions, and identify those contracts where services are supplied through a PSC and where they think IR35 may apply. And where IR35 does apply, businesses should undertake a status determination in each case.”
This, he said, required reviewing both the contract in place and the day-to-day arrangements for the supply of the contractor’s services; this would allow the business to determine the contractor’s status and prepare to provide a copy of the status determination to the contractor in time for the implementation of the new rules.
The next step, Mr Stevens reckons, is to consider whether new contracts need to be put in place to manage the risks. He said: “If the audit and status determination identify concerns about the status of the consultant, the business should consider whether it needs to agree different arrangements going forward. If new arrangements cannot be easily agreed, this may require the employer giving notice to terminate the existing contractor arrangements.”
Of course, in cases with lengthy notice periods, implementing change may be complex and early action may help the business manage those risks.
Determining employment status – an example
IR35 has been in the news of late – pun intended. In September, the First-tier Tribunal (Tax) found IR35 applied to the provision of services of three BBC presenters through their personal service companies.
Joanna Gosling, Tim Willcox and David Eades are news presenters who are all engaged by the BBC for the BBC World Channel through their own PSCs. Each presenter was, at all times, the sole shareholder and a director of the PSC.
As Mr Stevens explained: “In determining the employment status of the presenters for income tax purposes, the First Tier Tax Tribunal made reference to the well-established principles set out in employment tribunal case law – mutuality of obligation between the parties, control, and whether other contractual provisions were consistent with a contract for service.”
He continued: “It appears that throughout a lengthy business relationship, the presenters (through their PSCs) were all engaged directly by the BBC under a series of fixed-term contracts. Within the contract, they were required to provide their services for a specified number of days in any one year, usually amounting to 150 days per year.”
From what came out in the case, the contract fee for the minimum days was usually expressed as an annual amount, with any additional programmes charged at a daily rate. The BBC had first call over the presenters’ time and if each wanted to accept any external work, consent was required from the BBC to pursue these opportunities. In addition, if a presenter could not undertake the work then a replacement from an established BBC pool would step into his or her place.
Mr Stevens said: “In light of these arrangements, the First-tier Tribunal (Tax) found that IR35 did apply. The contracts gave rise to an obligation to provide work and undertake it for a substantial part of the year and contained no meaningful right of substitution.”
It’s worth pointing out that the BBC also exercised a degree of control consistent with an employment relationship. In particular, it determined the place of work and the presenters were obliged to attend meetings, training and appraisals; presenters were contractually obliged to adhere to the BBC’s editorial guidelines and, although they provided significant creative input, ultimate editorial control rested with the BBC, even if not always directly or immediately exercised; and the presenters were subject to restrictions on outside activities, including working for others.
As a result of this, the arrangements fell into IR35 and the payments made to those presenters should have been subject to income tax and national insurance deductions.
According to Mr Stevens, the principles set out in this case can be read across different sectors. He said: “An individual who provides work to a business through a PSC is likely to fall within IR35 where he or she is integrated into that business and not entitled to perform any services elsewhere.”
He strongly cautions practices that existing arrangements should now be reviewed to manage the risk of IR35 applying – and primary responsibility for tax being placed on the client/hirer’s shoulders.
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- IR35 has been in place since 2000. Public bodies were in April 2017 given the obligation to determine the status of a contractor; this will be extended to the private sector in April 2020.
- Until an organisation complies with its obligations it will be held liable for “missing” tax and national insurance.
- Practices should immediately take steps to assess every contract that they have to establish “employment” status.
- Notice may have to be given to locums who are caught by IR35 – contracts should be reviewed.