His Majesty’s Revenue and Customs (HMRC) is moving towards a conclusion of its lengthy review of the tax arrangements for locums in community pharmacy. If HMRC decides that locums should be treated as self-employed for tax purposes, nothing major should change. However, if a decision is announced that locums should be taxed as if they were employed, it could present community pharmacy businesses with a backdated claim for tax. This could amount to possibly half a billion pounds and add a tax obligation of many millions of pounds more per year going forward.
HMRC has been examining how locums engage with community pharmacy businesses in order to judge whether this should be considered an employed or a self-employed relationship, according to tax rules. HMRC does not rely on the terms of the ‘self-employed’ contract but evaluates the reality of the contractual relationship between the parties. There are legal factors that dictate the true relationship, which will show whether it is one of employment or self-employment. HMRC will go through the terms in detail to establish this.
If the outcome is that locums are to be taxed as if they are employed, then the PDA believes there are three principal ways in which community pharmacy businesses may respond:
Accept and pay
The first response is to pay what is demanded. Neither citizens nor corporations can simply decide whether or not to pay the taxes requested by HMRC. So, the default position is that any tax must be paid, including backdated obligations.
For locums, this would mean that tax would be deducted before payment by the employer. If this means the locum has a higher tax burden than when they were treated as self-employed, then their post-tax (net) earnings would be reduced, unless they are able to negotiate higher rates.
That will have significant consequences. One employer body, the Company Chemists’ Association, which speaks for eight of the largest chains of community pharmacy businesses, has already been reported as saying that they believe this would cause patients to suffer and pharmacies to close down. To read the media report, click here.
Consequently, some locums may re-examine their relationship with certain employers and conclude that they should not only be treated as employed for tax purposes, but they should also be entitled to the benefits of employment. The situation will depend on each individual set of circumstances and PDA members should contact the PDA Service Centre if they believe this may apply to them.
Regardless of how each locum pharmacist presents themselves, the reality of the relationship, whether employed or self-employed, is subject to the ‘multiple test’ that is set out below. Employment tribunals will examine the contract on a case-by-case basis on each occasion. If found to be employed, then there will be entitlement to sick pay, holiday, and other contractual rights, but also an obligation to pay income tax and NI as an employee.
Challenge the application of the rules/get the rules changed
Disputing the decision is the second major way in which businesses may choose to respond. Businesses may believe that tax regulations have been applied wrongly and try to challenge the HMRC decision.
Businesses may also try to lobby the government to change the tax rules or request a special dispensation to community pharmacy businesses. This would mean asking for the sector to be treated differently from other parts of the economy.
Several of the major community pharmacy employers have been trying to influence the outcome of the review for some time, including by engaging top tax experts to support their case. If, despite those efforts, it’s nevertheless decided that locums should be treated as employees for tax purposes, it would suggest that successfully challenging the rules would be very difficult.
The PDA believes this would likely be an even more challenging argument to win, given the government’s current economic pressures and their need to urgently increase tax income.
Changing employer behaviour
The final major option for how employers may respond to an HMRC decision is to reflect on their own behaviour. By changing their behaviour, they might also change the situation. Of the three major options, this is the one which is almost entirely within the power of the employers themselves, as it does not require HMRC to change their position.
For example, one of the factors considered by HMRC is a pharmacist’s right to substitution. The right to substitution means that if a locum is engaged to provide services, they do not have to undertake the duties personally and could send an alternative pharmacist to do the work instead. The business would still pay the locum, who would pay the alternative as necessary. Community pharmacy businesses generally do not allow this in practice, and so it is one of the business behaviours that could have influenced HMRC to determine that locums are employed.
Self-employed suppliers can also genuinely negotiate rates, but some community pharmacies advertise shifts with predetermined rates or rate caps, indicating a ‘master/servant’ relationship, which is more likely to indicate employment than self-employment. This is another practice which could make HMRC more likely to conclude that locums are employed.
These are just two examples. If community pharmacy businesses have imposed these controls, despite them saying they prefer the idea of locums being self-employed workers, then they are more likely to influenced HMRC to decide that an ‘employed’ status is more appropriate.
The PDA will be observing the reaction of employers to any HMRC decision. The PDA will support pharmacists, whether employed or locum, to understand and exercise their rights accordingly.
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PDA membership is tax deductible
On the subject of taxation, the PDA would like to remind pharmacists that PDA membership is a tax-deductible expenditure for all members. Find out more here.
Learn more
- Government perform double U-turn on IR35
- PDA comment as large employers respond to HMRC investigation into tax status of locums
- Locums report being told to reduce agreed shift rates or be cancelled
- PDA urges locums to ensure they are ready for roll out of IR35 into private sector
- PDA membership includes access to a 24-hour legal and tax advice helpline
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