IR35 – FAQ’s & What You Need to Know

Once again we are discussing IR35 and the impact within the private sector from April 2021. It’s not the most interesting subject, made worse by conflicting information and a general lack of clarity from large parts of the private sector on how they will be proceeding. However, the lack of action within the private sector (specifically healthcare) is in part due to the desire of clients to not rush into any action that would replicate what we saw in 2017 with the NHS and its blanket approach.

The golden question being how does this affect your work as a locum? I will attempt to answer this, along with other questions we have received. Below I have split the subject into 2 sections, section 1 being bite size basics, which you can read in between patients, or during your regular breaks… (that latter being sarcasm). Part 2 is a more robust, content heavy overview that I advise reading with a large coffee, or if you’re suffering from insomnia.

Part 1

The Basics

-In April 2021, the changes we saw in the public sector 2017 take effect within the private sector.

-The responsibility for assessing the workers status has now become the duty of the end user – The draft legislation puts the burden of responsibility on the entity that pays the contractor.

-The revenue have re-released their CEST Tool for clients/employers to assess the workers status (CEST Tool is an online assessment, multiple choice questions that produces an in or out of IR35 verdict).

FAQ’s/Facts

-If you work via your PSC pre-April 2021, this should continue under the changes as your status wouldn’t change i.e. if you are outside of IR35 now, that should still be the case post-April 2021 as the only change here is with whom does the assessment, not the assessment itself.

-From April 2021 will every locum have to be PAYE?

Each employer has to assess the status of each locum/contractor, following which you will be given the result and proceed from there. Should you wish to contest the outcome, you can demand a reassessment of IR35 status – as the assessment is a multiple choice questionnaire, this is to a certain extent, a subjective process.

-AppLocum has carried out 30 test case assessments on PSC workers (15 ANP, 15 GP) to test the outcome and have found 0 of these workers to be inside of IR35. This is certainly interesting, if not unsurprising too, as with a GP and ANP the argument of SDC (supervision, direction, control) becomes very diluted and is open to being contested – e.g. as a GP or ANP, the care, advice etc you choose to administer within a consultation is of your own fruition and is most certainly not supervised, directed or controlled. SDC is only a part of this assessment, but I wished to display how ambiguous, to an extent, and subjective this assessment can be.

-None PSC workers, such as Practice Nurses and/or Band 6, Band 5 workers will be required to have an assessment. SDC is harder to argue, but there are certainly discussions to be had with each client placed into.

Where do you stand with your work booked through AppLocum?

-We are approaching this subject carefully and will be releasing our IR35 policy soon. Keep an eye on our social media or contact us to be added to our mailing lists.

Summary

-Don’t panic! The Revenue are not outlawing working via a PSC, nor are clients. This change applies on a case-by-case basis.

-AppLocum are not Accountants. The above is to be taken as advice/industry supplier guidance and not as the gospel according to HMRC. The first thing I did and have done during this process is seek advice from our Accountant, which I wholly advise you should do too.

Part 2

IR35 – April 2021

Following the introduction of IR35 reforms in the public sector in 2017, HMRC has confirmed that the new rules will now be extended into the private sector, effective April 2021. These changes are not retrospective. IR35 rules were originally introduced in the UK in 2000, with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would. IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. Consequently, HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle.

What are the changes?

The reform will place the responsibility for assessing whether IR35 applies onto the private sector end user (our clients) of the worker’s (our locums) services, for all payments by medium and large businesses from April 2021. Where it is concluded by the end client that IR35 applies, the fee payer (in this case AppLocum) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.

Small Company Exemption?

The new Off Payroll Working Rules will only affect medium and large private sector organisations, so “small” end clients are set to be exempt – the definition of which is based on the Companies Act 2006 definitions. However, from April 2021, based on criteria below, our Clients are deemed to be medium-large businesses and therefore will be responsible for carrying out an assessment to determine whether Limited Company locums’ roles are inside or outside IR35 legislation. If your role is deemed to be inside legislation, you will be subject to PAYE and NICs deductions.

The new rules will only apply to medium and large businesses in the private sector who are the end user of the worker’s services and to the fee payer, if different, such as fee payers in the recruitment sector. This exemption will therefore not apply to GP practices holding GMS or PMS contracts due to their being within the public sector.* The Government have indicated that they intend to use ‘similar criteria’ to that found in the Companies Act 2006 to define a medium-large business. Under current legislation this is broadly a business that has two or more of the following features:

-a turnover of more than £10.2m

-a balance sheet total of more than £5.1m

-50 employees or more

Making the status determination – “inside IR35” or “outside IR35”

From April 2021, it will be our clients’ responsibility to determine whether the IR35 Rules apply. You can refer to the HMRC guidance and the employment status for tax (CEST) tool. Although feedback Is varied, the CEST tool does give you a good steer of the approach taken by HMRC and the indicators that they are looking for. HMRC have confirmed that they are making enhancements to the CEST tool, these changes are expected to be delivered before the end of 2019.

Assignments “Outside IR35”

If the client makes the status determination that an assignment is “outside IR35”, they must ensure that “reasonable care” was taken during the decision-making and that the decision itself is reasonable. If the client does not exercise reasonable care, the status determination statement will not be valid, and the client will be liable for the unpaid taxes.

Assignments “Inside IR35”

If the client determines that an assignment is “inside IR35”, several options are available to you in terms of an alternative to an off-payroll model. The options are:

-“Inside IR35” PSC – Should you wish to continue to engage as a locum via your PSC who is deemed “inside IR35”, your employer will calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is your income after deductions, including both employee and employer NICs and the Apprenticeship Levy.

-Umbrella Company – Where an umbrella company employs you as a worker directly, the off-payroll working rules do not apply

-Neither worker rights nor stakeholder pension rights apply. No expenses allowance applies

IR35 FAQs

Determining whether the assignment is inside or outside IR35

To determine whether a locum will fall Inside IR35, key criteria are reviewed to establish employment status. A decision is made about a hypothetical contract between the locum and the end-client, and whether, if those two parties were contracting directly, there would be an employment relationship. However, the route to determining employment status is fact-specific and in some cases, there is no clear outcome.

It is worthwhile working through HMRC’s employment status for tax test and entering different responses to gain an understanding of the different outcomes. Essentially, if a locum has similar working conditions, responsibilities and control as an employee of the client would have, then they are likely to be classed as “inside IR35” (i.e. the Off Payroll Working Rules apply). Case law is evolving constantly in the tax tribunals, courts and employment tribunals but the key factors that determine a locum’s IR35 status are as follows:

Substitution

A genuine right of substitution has long been deemed to be a very important factor when demonstrating that a locum’s assignment falls “outside IR35”. For a substitution to be considered valid, the right to supply a substitute must be a genuine one. This means that the client must agree to it in practice, the locum must pay for the substitute, and it should be an unfettered right. An unfettered right of substitution means that a client must accept a substitute if the initial locum is unavailable. HMRC have now qualified the criteria within the CEST question on substitution, which states that a client’s need to be satisfied that the substitute has the skills and experience required or to ensure the substitute is approved under their security processes does not negate the right of substitution.

Control and Direction

In most cases where professional services are provided, it is important that a locum can demonstrate a certain amount of autonomy in the way they undertake a project. Both the written contract and working practices must show that the client has no influence over how the locum performs his/her services.
Control factors that may point towards an “inside IR35” status include:

-Indicating that the locum will be supervised

-Including any “staff” benefits (including holiday or sick pay)

-Including start/end/break times

-Contractual clauses that specify any rights of control or supervision over the locum.

The reality of the situation is that the individual is responsible for the delivery of the services. The individual will determine and control how and when they provide their services to the client, if they meet client-specific targets or project completion dates. It is worth noting that any clauses referring to control should be reflected in both the first tier (between recruitment business and client) and the second-tier contracts (between recruitment business and locum).

Mutuality of Obligation

This is a hotly disputed area of law, as the position of HMRC is different from that of many practitioners and case law. It is an obligation between the parties to provide and accept work. In an employer/employee relationship, mutuality of obligation is easy to establish. However, in client/locum relationships, it is less clear. HMRC states that by having a contract agreeing to provide services, mutuality is established but most experts consider the legal picture to be more complex. It is likely there will be more clarity on this in the coming months.
Other factors include:

-Provision of equipment

-Any absence procedures

-Continuity of the engagement

-Termination agreements

-Notice periods

-If the locum has become “part and parcel” of the organisation.

I work for lots of clients, does IR35 still apply?

The Off-Payroll Working Rules will still apply irrespective of how many clients and assignments a locum is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent locum, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis – working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.

The client does not understand / will not apply the new IR35 rules, do I need to worry?

From April 2021, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether IR35 applies. If the client either 1) fails to make a status determination, 2) fails to pass the status determination down the supply chain, or 3) fails to take reasonable care when making the status determination; the client (or AppLocum as the recruitment agency) may be liable for the tax and NICs as they deemed “fee-payer”.

We will continue to engage with our clients and you as a locum regarding the new rules to help to ensure that all parties are prepared for April 2021. It is important that clients exercise reasonable care when making a status determination, given the issues that arose from the public sector reform in April 2017 as a result of blanket “inside IR35” determinations.

If you are providing services to a small private sector client, they will be exempt, and they are not required to follow the new IR35 rules. Your PSC will remain responsible for determining your IR35 status and making the appropriate tax deductions and NICs.

Can I be involved in the client’s status determination?

It is expected that you will be involved to some degree in the client’s status determination process, as there are some questions in the HMRC CEST tool or similar tools which have been created, which require the locum’s input – for example questions on how you run your business. However, there is no statutory right for a locum to be consulted during the status determination process.

I do not agree with the client’s status determination, can I appeal it?

The draft legislation imposes an obligation on the client to provide a “client-led status disagreement process”, either the recruiter or the locum may disagree and follow the process. The client must respond to a request to review the status determination statement within 45 days. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.

If you disagree with the client’s determination, you will need to write to the client and give reasons why. You need to ensure you keep records of status determinations and any corresponding disagreements. During the dispute process the client’s determination stands.

Can I be forced to pay for employer’s NICs?

Recruitment businesses cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may adjust the locum’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.

Do I get employment rights if I am “inside IR35”?

Should you wish to continue operating as an “inside IR35” locum, you will not benefit from any “employee rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your PSC.

If your assignment falls “inside IR35”, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR, you are entitled to comparable pay to a permanent employee on the client site. If you opt to engage via an umbrella company, you are an employee of the umbrella company and therefore you will benefit from employment rights and AWR will apply.

My assignment is for 2 years – is it automatically “inside IR35”?

The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status of an assignment.

If you are still awake at this point and have any questions please do not hesitate to contact the team at AppLocum and we will do all we can to help.

*Correction implemented 22/04/2021