IR35 and its impact for us locums
We keep hearing that IR35 will come into force from April 2021 - this is incorrect. IR35 has in fact been in force for a lot longer, however just in the public sector. Now it is being rolled out into the private sector; therefore Specsavers, Vision Express, and high street practices are now being affected by this, whereas our colleagues working say in hospitals must have already come across IR35.
It is estimated that the impact of this could mean that locums could end up paying approximately 20-25% more in tax. In this article, I aim to breakdown what IR35 is and the impact it can have on us locums in Optometry.
What is IR35 and why is it being implemented?
IR35 was first introduced in 2000 to reduce tax avoidance by contractors who HMRC believed to be ‘disguised employees’ – people who work in a similar way to full-time employees but then invoice for their services via their limited companies to make their business as tax efficient as possible. HMRC plans to closely examine the de facto nature of the employer-contractor relationship, rather than relying on what is set out in the contract agreed by the two parties. If the intentions of the parties, as expressed in the contract, bear no resemblance to the real intentions of the parties, the written intentions will likely be ignored by HMRC. This refers to the principle of ‘substance over form’ taking front seat in terms of how HMRC will assess going forward.
What is happening from April 2021?
A lot of locums are slightly ill-informed that this is something new and HMRC have suddenly decided to clamp down on freelancers who work as pseudo employees - this is in fact not true. The change from April 2021 is purely that the onus of determining if a locum is under IR35 is on the employer, whilst historically it was on us locums to decide.
So, from April 2021, your employer(s) will now be responsible for assessing whether contractors/locums working for them need to pay income tax and national insurance contributions.
What does it mean to be inside / under IR35?
If you’re deemed to be inside/under IR35 then HMRC sees you as a pseudo-employee of the company for tax purposes. This means you will be liable to pay the same PAYE tax as an ordinary full-time employee.
A few locums have mentioned that the impact of IR35 does not affect them as they only locum for Independents; this is partially correct. IR35 is currently being rolled out to only medium to large clients. Independents do not fall under these remits. However, all this means is that those employers do not have the onus to determine your status, but that responsibility still lies with you to determine your employment status, which dictates whether you’re an employee, a sole trader, or a ‘worker’ which is somewhere in between the two.
Note: Whilst we might think of each Specsavers, Vision Express (the big multiples) we work for are small individually as standalone branches/franchises, they are however medium to large as a group. The IR35 legislation applies to the parent (head) company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities. So, all the individual stores are connected entities to make the one parent company.
What makes IR35 so controversial?
Well there are quite a few points that make this such a hot topic for us locums:
- If we are deemed to fall within IR35, we are having to pay more taxes yet not benefit from employee benefits such as holidays, sick pay, etc.
- There is a concern that even if the rules of IR35 do not impact a particular employer (due to their small size i.e. independents), the employer may still take a risk-averse approach and qualify you as being inside IR35.
- The major point is that most employers have prepared for this by making you the locum take full ownership of this situation. If you look at your locum agreement with the respective employer, there is a good chance there is a point that states something along the lines of:
“You declare that you are self-employed and that HMRC is aware of this status. If, however, HMRC deems you not to be self-employed and rather under IR35, then any additional taxes and penalties due, will be passed on to you, the locum”
With such clauses, the employers have tried to ring-fence themselves from any untoward HMRC investigations and any undesired consequences. Thus, you the locum are instead signing up towards transferring all associated responsibility and any consequences unto yourself. Can such a contractual clause be upheld in a court of law, it is too early to say.
So how much worse off can a locum be if found to be under IR35
Assuming you locum 4 days a week, 48 weeks a year, have £3,000 p.a allowable expenses, take a salary of £12,000 p.a and all your work is under IR35 then you are estimated to be worse of by c£7k if taking £275 per day.
How will HMRC look to assess if I am in or out of IR35?
HMRC will look to examine your working practices to determine your IR35 status. Locums will need to ensure their contracts accurately reflect the working practices followed in their locum/contractor relationship. HMRC investigations are not confined to the contract you have in place with the employer but will examine the working practices you follow.
Determining whether IR35 applies to your assignment is a complex matter. There are three key principles that will determine your IR35 status. We shall explain what these are here and bring in some previous cases which have gone to tribunal to highlight why the judge ruled for or against the contractor. As this is a new policy, there are still no set precedents and the fact that HMRC have lost cases in tribunal, highlights how confusing it really is to determine whether one is in or out of IR35. All advise given here is our opinion and understanding of the matter and we advise you to consult with an IR35 expert before taking any significant actions.
Supervision, direction and control – Does the client have much control to decide how you should carry out your work? If yes, means you are under IR35.
This can be disputed at best, as you could argue that I carried out my pathology assessment via direct rather than indirect mechanism (Volk) or carried out the testing for pressures via contact tonometry and not NCT. Such practices demonstrate a level of autonomy in one’s work that would differentiate a contractor from a permanent employee.
Substitution – Can you provide a substitute to go in place of you to the client? If yes, then you do not fall under the remit of IR35.
One way to demonstrate you are indeed a business and not providing a personal service, it is recommended to have a clause within your contract that allows your company to provide a substitute in your absence.
These clauses have been hotly debated in a series of employment status claims over the last few years, often with adverse results.
Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?
In layman terms, this means that you as a locum must be working client to client, with no obligation to carry on working for the client after the work is complete.
A contractor also has the right to terminate a contract part-way through. An employee, on the other hand, can only work for one company and has an obligation to carry on working when their tasks are complete.
You should also check whether the contract allows you to take on projects from other clients simultaneously, or whether the client can veto other assignments.
In addition to the above, below there are some further considerations you should make, as these can ebb you in or out of IR35.
Payment: An employee is expected to be paid at regular intervals, whereas a contractor will usually receive payment when work is completed. A contractor would invoice for the hours worked.
As locums we invoice our employers as and when we have worked a locum day. Other than Boots, our payments are made as and when the invoices have been approved and swept up under by specific payment runs, which are different to the regular monthly employee payroll run.
Variety of work: Having variety of work with different employers is indicative you are a contractor and not an employee. An employee is usually obliged to have only one client at a time.
As locums we do work for a variety of different clients. If you have regular work and that is also for multiple days, then the lack of variety can work against you. Regular, guaranteed weekly or monthly work, specified in a contract, looks more like an employee ‘contract of services’ rather than professional fees paid to a person who is self-employed. Variety is not seen on a week by week basis but on a period by period basis.
Equipment/tools: A contractor is expected to bring their own equipment, rather than equipment supplied by your client.
As locum Optometrists we do bring our own volk, trial frame, Ophthalmoscope, Retinoscope, etc. Equipment up to the value of circa £1.5k. However, there is an argument that whilst this is somewhat a material amount, it is insignificant when compared to the other machinery we use to such as OCT and a Fundus camera which cost circa £30-50k each.
Place of work: Your contract with the employer should state the location of where you are due to work.
Financial risks: A contractor required to arrange their own professional indemnity insurance is indicative that you are acting as self-employed rather than an employee. If you cause a loss of business to the employer and rectify that, then it means that you are taking the financial risk, which a contractor would. As an employee, you are not responsible for making up the loss.
Employee benefits: Benefits such as holiday, sick pay, workplace pension, GOC fees paid for are common things offered to employees and not to contractors.
Part of the Company: A contractor should not become a part of the company’s organisation. Things such as appearing on their organisation chart or appearing as a name on rotas compared to it stating ‘locum’ can indicate you are part of the company.
Having been a locum I have seen staff rotas in the staff room, where they sometimes have regular locums referred to by their name, whereas ad-hoc locums are annotated as ‘locum’. As a locum you should distance yourself from the company’s structure. When I was a resident, something that made me highly proud of my service was having clients wanting to see me for their recall examinations. As a locum, if you experience clients being booked in with you upon their request, this would perceive you to be part of the company. Your patients should be able to determine that you are a locum (temp cover) and therefore not a part of the inherent team, hence maybe as part of your introduction you could mention that you are the locum for the day and unable to facilitate a booking for return appointments with yourselves.
We have analysed some existing case laws and provided our commentary on them as to how those particular points could be related to our field in Optics, which you can view here. In addition we have uploaded FAQ’s, which can be viewed here. If you can not access either of these then please drop me an email at [email protected] and I can email them direct to you.
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