The PDA cannot give tax advice, nor does it advise members on how to set up their business arrangements, however, the PDA recognises the significant potential impact on locums from this change and hence recommends those members check their arrangements and understand the likely consequences of this change by obtaining expert advice from their tax and business advisors.
Please note: In community pharmacy, the phrase “contractors” is often used to mean pharmacy owners because they have the contract with the NHS to provide services. In this article “contractor” is used as it is in the wider business world, to mean a “locum” who has been engaged to provide pharmacist services by a “client” (such as an independent pharmacy or multiple)
IR35 is tax legislation aimed at addressing perceived tax avoidance through “disguised employment”. That means situations where someone is being engaged as a contractor through an intermediary such as a locum agency or their own company, rather than being employed, but in fact, they should be treated for tax purposes as an employee and therefore having income tax and national insurance contributions (NIC) deducted before payments are made. The government believe this situation is widespread and so £100Ms of tax income, needed to pay for public services, is not being collected.
This change was implemented in the public sector in 2017 and as a result, the HMRC say they are now receiving more tax income. However, changing tax treatment could cause locums to take home significantly less income and therefore it is important they are prepared for what is about to happen.
Until now, in the private sector, it has been for the contractor to decide their employment status and hence their tax arrangements. From April 2021, unless the main client (pharmacy business) qualifies for the “small company exemption” they will be required to determine the contractor’s IR35 status. If they decide the contractor should be taxed as an employee, the client will be required to deduct tax and NIC at source alongside the PAYE deductions they make for their actual employees.
What is a small company under IR35?
Two or more of the following must apply for a client to be deemed a small company and therefore NOT to be responsible for implementing IR35 and deducting any tax due:
1) Turnover not more than £10.2m.
2) Balance sheet not more than £5.1m.
3) Not more than 50 employees.
If the client does not make the deductions, and the HMRC later decide they should have done so, then the client will be responsible for paying the missing tax and NIC to HMRC. Hence, to avoid that financial risk to themselves, some clients will take a cautious view and be more likely to deduct the tax and NIC in any cases other than where genuine self-employed status is completely beyond question.
PDA members are already reporting a change in the behaviour of some larger multiples with, for example, a refusal to pay locum fees into business bank accounts and instead insisting all locums provide PERSONAL bank accounts.
How does HMRC (or a client, or you) decide if you should be treated as an employee for tax purposes?
Employment status is a complicated area of law and your tax status is only one consequence of your status. Rights for benefits such as holiday pay, sick pay and others may also depend on whether you are deemed to be an employee or not.
While what is written in the contract is important, the reality of your relationship with a client (or employer) is even more critical. Often some attributes of the relationship may suggest you are an employee, whereas others may suggest you are a contractor. All factors need to be considered and the overall position will be established based on a comprehensive view of the true relationship.
An example of a factor often discussed is the right to substitution. That means a contractual right to substitute a representative subject only to reasonable criteria such as suitability, in other words when engaged as a locum, can a contractor send an alternative pharmacist to undertake the shift for them, or does the client say the contract is just for that specific contractor personally? HMRC expect substitution clauses to be a genuine reflection of the relationship, rather than an attempt to disguise the reality of what happens. There has been much legal discussion about where there is and isn’t genuine substitution and so this is not straightforward.
The contractual right of substitution, or the absence of such a right, is one of several factors in the multifactorial test. Other factors include:
- The level of control the contractor has as to how, when and where they undertake the activity.
- The mutuality of obligation – such as any expectation that the contractor has a continuous offer of work with that client and there is a personal obligation to do that work.
- Whether the contractor provides their own equipment, uniform, training, etc.
- If the contractor is receiving employee benefits, such as holiday pay, sick pay and pension rights.
- How much financial risk is carried by the contractor – Do they have their own insurance and do they get paid more for working extra hours/less for working fewer hours?
- Basis of payment – what does the contract require the contractor to provide in return for payment.
- How integrated are they into the client organisation? For example, do they attend team meetings, staff parties, access staff benefits, do they manage other staff, are they a keyholder and so on?
- Whether the contractor has multiple clients and whether the client invites tenders of the work from multiple contractors. How the rate is negotiated between the parties and agreed?
- Length of contract – is this a long term arrangement?
- Does the contractor behave like a business? For example, do they have their own website and headed paper? Do they advertise? Are they registered for VAT and the Data Protection act? Do they employ others? Do they have an office?
The HRMC also provide an online tool called CEST (Check Employment Status forTax). However, members report that often the tool ‘s result can be unclear and it may not be an accurate determinant of the true relationship
Can I appeal?
When a client decides that a contractor is to be treated as an employee under IR35, they must issue the contractor with a Status Determination Statement (SDS) before making the first tax and NIC deduction and should provide an opportunity to challenge their decision. If there is an agency in the chain between the main client and contractor, then the agency must also be provided with an SDS. The SDS must include details of the employment status decision reached as well as the reasoning behind the conclusion.
However, the “appeal” will still be internal to the client and so it remains their decision. Undoubtedly, clients will remain mindful of the risk of them becoming liable for unpaid tax if they do not deduct it at source and if unsure may decide it is easier for them to deduct and leave any contractor to argue for tax back from the HMRC, rather than risk that obligation.
Act now
The PDA recommend that locums consider this change with importance and take the advice of their tax and business advisors. Locums should also act appropriately when agreeing new contracts and delivering in practice the terms of contracts with their clients.
Alternatively, having considered the above, pharmacists may believe that despite having a locum contract they have in reality actually been working as an employee. If so, they may wish to consider whether they would like to try and claim employee status. If they were successful in this respect, they would be able to establish employee rights such as holiday and sick pay and claim continuous employment status, which could provide job security. They may also be able to claim holiday back pay. As an independent trade union, the PDA is able to give our members advice on this situation, if you are a member you can contact the PDA service centre to discuss your specific circumstances.