IR35 – Are You Ready?

IR35 legislature will have a serious impact on locums – and the GP surgeries or hospitals that employ them. It is essential that you understand the implications of IR35 as a locum and plan your business affairs accordingly.

What is IR35?

IR35 is a piece of government legislature designed to combat tax avoidance. It is important to note that we are using the word tax avoidance, not tax evasion.

Tax avoidance is sometimes simply viewed as, “clever accounting.” Tax avoidance is not a criminal offence. It involves finding loopholes in the law that minimise payable tax implications at the end of a financial year. Tax evasion is a whole-hearted attempt to deceive HMRC by falsifying documents and income reports.

Here is an example of tax avoidance that a locum could previously adopt, which is now rendered obsolete by the introduction of IR35:

-A locum sets themselves up as a limited company and seeks employment under this umbrella.

-The locum obtains a contracted position with a GP surgery. The locum earns £70,000 during this financial year.

-If the locum was an employee, tax would have been deducted from their monthly pay at a rate of 40% of their salary. As the locum is working as a limited company, they must complete a tax return for the financial year and pay tax on this.

-The locum’s limited company is obliged to pay a business tax rate of 19% of all profitable income.

-The locum will then need to pay personal taxes – unless the annual dividends withdrawn from the business are below £12,500.

-This is where tax avoidance comes in. If the locum only paid themselves a dividend of £12,000 over the year, leaving the rest in the business account, they will not be responsible for any personal tax.

This means that the total income tax due would be around £13,500, paid by the limited company. If the locum was a salaried employee, they would have paid closer to £23,000 in tax. While it looks unethical on paper, this form of tax avoidance was entirely legal prior to IR35.

As you can imagine, HMRC were not happy with this shortfall. Therefore, IR35 was introduced. Essentially, the legislature is designed to eradicate ‘disguised employment’ – an individual performing the same duties as a salaried employee, but only paying a fraction of the same tax due to their limited company status.

As of now, any locum seeking work through an NHS employer will be tested to see if they operate inside IR35. If you work as a locum and are considered to be inside IR35, it will create significant changes to how you are paid – and how you pay income tax and national insurance. The burden of establishing this will fall upon your employer.

Will IR35 Impact Me?

This depends on how you do business with your employer.

If you conduct your locum work as a sole trader, invoicing your employer directly and completing an income tax self-assessment as the end of each financial year, IR35 will not impact you.

If you are paid through a locum agency, the agency will be responsible for ensuring your IR35 compliance. The agency will ask for information about your business practices to determine if you fall within IR35.

If you invoice an employer directly as a limited company, the employer is responsible for your IR35 status. Again, you will be asked about your business practices. The employer will then decide if you fall within IR35.

My Limited Company Falls Within IR35 – Now What?

If your employer deems you to fall within IR35, it will significantly change the structure of payments. The key changes are:

-You will be paid through your employer’s payroll, with tax and national insurance deductions made monthly.

-Your employer will pay an additional 13.8% of national insurance on your annual salary.

-You will receive payslips and a year-end P60 that summarises your financial earnings.

You will not automatically be entitled to the benefits associated with permanent employment, such as maternity leave, sick pay or protection against unreasonable behaviour or unfair dismissal. IR35 has the financial implications of permanent employment, but few of the perks.

It should be noted that no burden of personal responsibility falls on your shoulders. It is entirely down to your employer, who will be fined if they are found to be allowing a locum that should fall within IR35 to operate outside the legislature.

This could mean that any surgery or hospital could hedge their bets and claim that all locums fall within IR35. This is frowned upon by HMRC, who insist that all contractors should be assessed on a case-by-case basis. You also retain the right to decline a contract within the boundaries of IR35 and look for work elsewhere.

If you choose to accept, you have two choices:

Accept the contract, billing through your limited company. Your company will be paid by your employer’s payroll, minus income tax and NI contributions. You will then draw this payment as a salary, not a dividend. You will not be liable for any further tax – that has already been paid – but your limited company is now basically redundant. You are just creating needless admin for yourself. You are better off being paid directly unless you have a reason to retain business accounts.

Alternatively, you could bypass invoicing through a limited company and accept a contract, negotiating terms of employment with the surgery or hospital. Remember, if you take this action you are not automatically entitled to employee benefits. You are free to attempt to negotiate mutually beneficial terms of employment, however. This policy will also entitle a locum to take their employer to a tribunal if they feel they are not being treated fairly in the workplace.

This will leave you with a lot of think about. IR35 certainly changes the way that locums do business with potential employers. Discuss your options with your accountant and proceed in the way that is best for you.