What is IR35
In years gone by, IR35 was a term your accountant brought up once year in your annual review meeting, and the moment you left it became a distant memory. Now with some public cases and rule changes HMRC has got everyone talking about it. And as a locum pharmacist, you need to know what IR35 is and how it affects you.
IR35 is a part of HMRC’s legislation. It deals with businesses who contract workers on a self-employed basis or through a limited company, rather than hiring them as an employee. These are called off-payroll workers.
There are many reasons why a business may do this, such as having the ability to only use and pay them when needed, or to not have to accrue or pay holidays for the individual.
Amongst the commercial benefits, there are also some tax advantages for both the business (the client), and the locum pharmacist (the worker), and it’s because of these tax advantages that the approach is now under serious scrutiny from HMRC, as they feel they are missing out on tax.
IR35 and locum pharmacists
So, what are the tax benefits for locum pharmacists? Most locums will be working through a personal service company. This means that they can put through expenses for running their business, such a mileage, computer equipment, working from home and even running a tax efficient car through the business. However, the main benefit comes from how they remunerate themselves, as they can pay themselves a small salary and take dividends out of the business, which in most cases leaves them with a significantly smaller tax bill than if they were employed. The client will also save national insurance by paying the worker in this way. The benefits can be seen from the example below:
A locum pharmacist working through a personal service company, with their spouse as a shareholder, could receive net income of £91,800 from an £120,000 income. If they were treated as employed, their net income would be £74,290 and the client / employer would pay an additional £16,560 in national insurance.
The way these workers set up their locum pharmacy activity is within the legislation, and it is how lots of businesses are set up in many industries. The issue HMRC has, and what IR35 legislation deals with, is whether the worker should be treated as an employee and taxed as such, rather than a contractor.
How has IR35 legislation changed and what does it mean for locum pharmacists?
In previous years, the responsibility, and the liability, was always on locum pharmacists to prove to HMRC that they were truly self-employed, and therefore fall outside of IR35. But now there has been some changes to IR35 legislation that affect locums. These are:
From April 2017, public authorities became responsible for deciding if the rules applied where they contracted workers who provide services through their own intermediary.
From 6 April 2021, all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the IR35 rules apply.
If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.
This has brought a shift in who is responsible and therefore who is liable for the extra tax if HMRC deem someone to fall within the legislation. Many clients don’t want to take any risk and therefore make their contractors become employed.
Along with these changes HMRC have introduced their ‘Check employment status for tax’ (CEST) tool to help clients and workers decide whether they fall within IR35.
This tool can be used to understand your position and see whether you can do anything differently to ensure you can stay using your personal service company. Some of the elements HMRC consider as part of this are:
Whether you have any financial risks
Whether you have the right to send a substitute
Whether you do or can work for other businesses at the same time
Who has control of how and when the work is done
Careful consideration needs to be undertaken when reviewing your contract and how locum pharmacists can ensure they do not fall foul of these rules. We always recommend speaking to a tax professional to gain clarity on your position if you are unsure.
If you would like to speak to a tax professional, Quad Recruitment has partnered with Sempar Accountancy and Tax Limited, who can not only advise you on IR35 legislation, and help you unlock big tax savings, but also help you with your annual tax and accounting compliance.
Pete Rossiter is Head of Tax at Sempar Accountancy & Tax and has almost a decade's experience helping businesses and individuals manage their tax affairs.