Off payroll working – HMRC IR35

Guest blog by Johnathan Jacobs, Prosperity Law

Q: – What is “IR35”?

IR 35 is a term used to describe tax legislation designed to combat tax avoidance by workers and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

If caught by IR35, the workers have to pay income tax and National Insurance Contributions (NICs) as if they were employed. This can potentially reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.

Under the legislation due to come into force this April, ‘dental associates’ may no longer be classified as self-employed.

Q: -What happens before 6 April 2020?

If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.

If you are a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.

Q: – What happens after 6 April 2020?

All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.

If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

Q: – How will this impact on the dental profession?

Government plans to reclassify or scrutinise the employment status of associate dentists could have a significant financial impact on dental practices.

This may mean that an associate dentist, therapist or hygienist may no longer be able to determine their own IR35 status, and the person who hired them, will be the deciding authority instead.

If HMRC goes ahead with reclassification, associates will be ‘employees’ and will no longer qualify for tax relief on expenses.

They will also be paying Class 1 National Insurance contributions and provide benefits to their ‘employees’ which will be costlier for the practice owner than the lower rate Class 2/4 national contributions for self-employed associates.

Q: – How will this impact on the sale of practices?

It will be the Principal of the practice who will be charged with the unpaid PAYE and employer’s National Insurance contributions.  This will have an impact on Associate Agreements and Associates should be aware that they may see clauses in their contracts affording the Principal the right to recover tax and National Insurance payments from the Associates.

The current position is that HMRC is writing out to dental associates asking searching questions about their status.  Replies, albeit not compulsory, have been forthcoming and once HMRC has sufficient evidence, they are likely to push for associate dentists to take employee status.  The concern is as to whether such right will be retrospective and HMRC will seek to recover tax for previous tax years.

Q: – Will this have an effect on indemnity cover?

Should associate dentists, therapists and hygienists become deemed employees, it will have a decisive impact on the professional indemnity insurance held by dentists as a legal requirement of practice.

Currently, every dentist is legally obliged to have their own indemnity or insurance cover in respect of professional negligence.  Should a dentist be found responsible for causing dental damage to a patient, it will be for their indemnity company to foot the bill for any compensation awarded and associated legal costs.

If, following the introduction of IR35, the dentists are no longer self-employed, it will be for the Principal to carry a policy which includes vicarious liability cover as if the act of negligence occurs during the course  of employment, it is for the employer (or their insurer) to bear responsibility.

Once again, this is something that associates should look out for before signing an Agreement as there may well be indemnity clauses written into dental associate contracts enabling the Principal to recover the costs of defending claims made against their practice.

Clearly, it is going to become more important to seek advice before signing a contract to provide dental services.  It is far better to seek the necessary legal advice beforehand rather than signing an Agreement and encountering problems that could have been avoided.

Q: – How will this impact on the National Health Service?

One final thing to consider is the cost to the NHS of implementation of the change of status to dental associates.  If IR35 does indeed serve to alter the way in which dentists operate, there will need to be a fundamental change to the way in which dental practices currently submit their monthly returns to the NHS Business Services Authority, which is the branch of the NHS that is responsible for payment to dental practices.  The costs of implementation are likely to be significant and could be a deciding factor as to how, if at all, the change is managed.

Prosperity Law, based in Manchester are a commercial firm of solicitors with a specialist Healthcare team, run by Jonathan Jacobs.  Jonathan can be contacted on 0161 667 3686 or 07776 132339 or at [email protected]