Significant changes to tax legislation IR35 are likely to come into force from April 2017. These changes have implications for any practice that engages workers, such as locums, through their own companies.
Here’s what you need to know:
What is IR35?
Put simply, IR35 is tax legislation that provides that workers engaged through intermediaries -principally companies that the worker owns (Personal Service Companies or “PSC”s) - may be regarded as being directly employed by the PSC’s client for tax purposes. IR35 allows HMRC to determine whether the working relationship, notwithstanding the existence of the intermediary, is, in fact, one of “disguised employment”, with PAYE and NICs then becoming payable if it is.
What have been the penalties for breaching it?
To date, it has been the responsibility of the PSC to decide whether the individual worker should be classed as an employee of the client. If HMRC determined that a worker engaged through a PSC should actually be classed as the client’s employee but hasn’t been, then the PSC was required to deduct PAYE and NICs from the sums paid to it and not received by the worker as salary (common practice being for the worker to pay the majority of such income as lower taxed dividend payments). The PSC has also been liable for any penalties and interest levied for past non-payment.
The current IR35 rules have served to protect clients from tax liabilities where they have engaged locums and other contractors through PSCs, since the PSC is responsible for determining the tax status of the persons engaged to carry out the work, and liable for any unpaid tax and penalties.
The new rules effectively remove this protection from “Public Authorities” and most GP practices will be caught within this definition.
In the first instance, it will be the Practice’s responsibility (not that of the PSC) to determine whether the person engaged by the PSC to do the work should be regarded as an employee of the practice for tax purposes.
If they should be, it will now be the practice’s responsibility (if it, rather than an agency, pays the contractor) to deduct PAYE and NI from all sums paid and the practice may be liable for unpaid taxes, interest and penalties.
How can you protect yourself?
We strongly recommend that you review your arrangements with existing PSC contractors before April 2017 to determine if the new rules may apply to your practice.
You should do the same in respect of all new contractors before taking them on.
The legislation provides for the use of an online IR35 assessment tool to determine whether the new rules apply, however, it may well be appropriate to instruct an independent expert to carry out a review instead.
In the first instance, the online tool may not be ready before the legislation takes effect. Even when it becomes available the results it generates will not, in the opinion of many experts, be accurate because of the complexity of the law in this area. There is also the suspicion that results (which HMRC will regard as binding) will be predisposed in favour of the rules applying in order to generate additional PAYE and NI.
A thorough independent review will not only identify whether the new rules are likely to apply, but will identify whether there are any changes, either to working practices or contractual documents (particularly by way of including tax indemnity provisions in favour of the practice), which could allow for the continued use of PSC contractors, with limited risk to the practice.
This will be of particular importance where a decision to deduct PAYE and NI from contractors’ remuneration could result in recruitment or retention problems.
For more information about IR35 and contracting, or for any other enquiries, please contact Daphne Robertson on 01483 511555 or email [email protected]