By Adam Bernstein
For some years HMRC and its predecessors – HM Customs & Excise and Inland Revenue – have been concerned by potential loss of tax revenue to the government. And so, set against the backdrop of wanting to be a low tax economy, it made sense that HMRC sought whatever it could from the tax regime in place.
One part of the regime is IR35, a set of tax rules that apply in the certain circumstances, namely where a worker provides services to a client/hirer through a personal service company (PSC) or an intermediary. The working arrangements should be such that if the worker provided the services directly they would be regarded for income tax purposes as an employee of the client/hirer.
As far as the law is concerned, a locum providing services to a private business – a practice — through their PSC is likely to fall within this definition.
Mark Stevens, a senior associate solicitor at VWV, recalls that the IR35 rules were introduced in 2000. “The government was looking to reduce tax avoidance through the use of PSCs across all sectors. This was particularly an issue for contractors in the IT sector, where the use of PSCs was very common.”
However, in April 2017, there were changes to the IR35 regime in the public sector – impacting local authorities and the NHS. The reforms, as Mr Stevens explains, “Shifted the responsibility to determine the status of the contractor providing services through their personal service company on to the end user – the public body. This meant that if a contractor is deemed to be inside IR35, the public organisation is required to deduct income tax and National Insurance as they would do for employees.” Any failure to follow the rules could make the body liable for any unpaid taxes, interest and penalties – which could be extensive.
The problem for the optical profession is that from 6 April 2021 the shift in responsibility rules will also begin to apply to it in the private sector.
What's changing?
From 6 April 2021, within the private sector, the client/hirer will need to decide whether or not the relationship with the contractor or their PSC is genuinely that of client/contractor or is actually one of employer and employee.
And Mr Stevens is very clear on the implications: “The client/hirer will be obliged to take reasonable care when determining the status of the relationship. The contractor will be bound by the decision concerning status made by the client/hirer.”
The new off payroll rules will only apply to medium and large private sector organisations from 6 April 2021, but Mr Stevens says that smaller private sector organisations will not be subject to the new rules if they have an annual turnover of less than £10.2 million, or a balance sheet total of less than £4.5 million, and the number of employees does not amount to more than 50. He adds that “if a business is smaller than the thresholds above that does not mean that IR35 is not an issue – simply that the shift in responsibility will not apply.”
Steps to take now
Noting a warning shot from HMRC, Mr Stevens says that the body has said that “where it does not receive the tax due then liability should initially rest with the party that has failed to fulfil its obligations until such time as it does meet those obligations.” In other words, the liability will be with the client/hirer.
But even where businesses – practices – are not caught by the shift in responsibility, he advises those who engage individuals through PSCs to take a number of key steps.
“Firstly, businesses should audit their terms and conditions and identify those contracts where services are supplied through a PSC and where they think IR35 may apply. And where IR35 does apply, businesses should undertake a status determination in each case.”
This, he says, requires reviewing both the contract that is in place and the day to day arrangements for the supply of the contractor’s services; this will allow the business to determine the contractor’s status and prepare to provide a copy of the status determination to the contractor in time for the implementation of the new rules.
The next step, adds Mr Stevens, is to consider whether new contracts need to be put in place to manage the risks.
“If the audit and status determination identify concerns about the status of the consultant, the business should consider whether they need to agree different arrangements going forward. If new arrangements cannot be easily agreed, this may require the employer giving notice to terminate the existing contractor arrangements.” Of course, in cases where there are lengthy notice periods, implementing change may be complex and early action may help the business manage those risks.
Determining Employment Status - an example
IR35 has been in the news recently. The First Tier Tax tribunal (the body responsible for appeals against some HMRC decisions) recently (September 2019) found that IR35 applied to the provision of services of three BBC presenters through their own personal service companies.
Joanna Gosling, Tim Willcox and David Eades are news presenters who are all engaged by the BBC for the BBC World Channel through their own PSCs. Each presenter was at all times the sole shareholder and a director of the PSC.
As Mr Stevens explains, “In determining the employment status of the presenters for income tax purposes the First Tier Tax Tribunal made reference to the well-established principles set out in employment tribunal case law – mutuality of obligation between the parties, control, and whether other contractual provisions are consistent with a contract for service.
“It appears that throughout a lengthy business relationship, the presenters (through their PSCs) were all engaged directly by the BBC under a series of fixed term contracts. Within the contract, they were required to provide their services for a specified number of days in any one year, usually amounting to a 150 days per year.”
In the case, the contract fee for the minimum days was usually expressed as an annual amount with any additional programmes charged at a daily rate. The BBC had first call over the presenter’s time and if they wanted to accept any external work, consent was required from the BBC to pursue these opportunities. In addition, if a presenter could not undertake the work, then a replacement from an established BBC pool would step into their place.
“In light of these arrangements,” says Mr Stevens, “the First Tax Tier Tribunal found that IR35 did apply. The contracts gave rise to an obligation to provide work and undertake it for a substantial part of the year and contained no meaningful right of substitution.”
It is worth pointing out that the BBC also exercised a degree of control consistent with an employment relationship. In particular, it determined the place of work and the presenters were obliged to attend meetings, training and appraisals. Presenters were contractually obliged to adhere to the BBC’s editorial guidelines and, although they provided significant creative input, ultimate editorial control rested with the BBC, even if not always directly or immediately exercised. The presenters were also subject to restrictions on outside activities, including working for others.
As a result of this, the arrangements fell into IR35 and the payments made to those presenters should have been subject to income tax and National Insurance deductions.
In summary
For Mr Stevens, the principles set out in this case can be read across different sectors.
“An individual that provides work to a business through a PSC is likely to fall within IR35 where they are integrated into that business and where they are not entitled to perform any services elsewhere.”
He strongly cautions practices that existing arrangements should now be reviewed in order to manage the risk of IR35 applying and primary responsibility for tax being placed on the client/hirer’s shoulders.
Key points
- IR35 has been in place since 2000. Public bodies were in April 2017 given the obligation to determine the status of a contractor; this will be extended to the private sector on 6 April 2021.
- Until an organisation complies with its obligations it will be held liable for ‘missing’ tax and national insurance.
- Practices should immediately take steps to assess every contract that they have to establish ‘employment’ status.
- Notice may have to be given to locums who are caught by IR35 – contracts should be reviewed.
- The shift in responsibility will not apply to a small business, i.e. those businesses where two of the following three apply:
- They have an annual turnover of less than £10.2 million.
- They have a balance sheet total of less than £4.5 million.
- The number of employees does not amount to more than 50.
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