IR35 Tax: How Changes to how IR35 Affects Therapists

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Therapists working as a freelancer, under a limited company that they work for or own may find themselves stung by new tax legislation that puts the onus of tax contributions onto the employer and aims to remove “hidden employment” contracts.  This law also applies to therapists employing contractors and running  clinics using self employed staff. 

IR35 is legislation that redefines the tax contribution requirements due by freelancers and contractors, equating the contribution requirements to that of employees.

What this means for therapists is that if you are working for more than 18 months for the same person as a freelancer, if you have set up a limited company that you work for, or you have hired people on freelance agreement,  you may be falling foul of the rules. 

What is IR35?

IR35 is an anti-avoidance tax legislation put in place to ensure that off-payroll contractors and workers are taxed at a rate similar to those who are employed. The aim of the legislation is to ensure that employees and contractors pay roughly the same amount in income tax and National Insurance as one another regardless of employee status.  

Who does IR35 affect? 

IR35 primarily affects those who are supplying professional services to clients via an intermediary such as a limited company, but who on paper would appear as an employee if the intermediary was not used at all. 

Since April 2021 changes have been made to the way that workers are taxed within IR35; outside of the public sector, it is now up to a contractor’s client to decide whether or not the rules of IR35 apply. If a worker provides services to a smaller client, the worker’s intermediary is responsible for deciding whether or not IR35 is applicable. 

Many self-employed contractors have been concerned about what this new guidance from HMRC means as the “unclear” criteria for determining who IR35 applies to has left many fearing that they will be wrongly positioned by worried employers.

In May 2021, the IR35  guidance was updated in response to the growth of  umbrella companies being set up to conceal the employment status of contractors. 

Who does IR35 affect?

Small businesses (as defined by the Companies Act as a company with fewer than 50 employees) will not be affected by IR35 tax. 

Within the mainstream healthcare sector, doctors, nurses, locums and other staff are supplied through intermediaries and therefore may need to review whether or not IR35 applies to them.

NHS Trusts, Health Boards and private sector clients are responsible for informing locum agencies and employees if their role falls inside or outside of IR35 legislation.

The IR35 rules impact both public and private sector, as well as:

  • Those working under a Personal Service Company (PSC).
  • Those working through an intermediary or umbrella company. 
  • Those who are paid gross as a self-employed worker.

The goal of IR35 is to turn a legitimate one person small business into an employee and so a HMRC inspector, rather than looking at a contract between a company and a self-employed worker, will instead look at the working nature of the relationship between them to ensure that the rules are applied effectively. 

An example provided by contractorcalculator.co.uk is the ‘Friday to Monday’ phenomenon whereby contractors or consultants who leave employment with an employer on a Friday only to return to the same role in the same office as a contractor or consultant on the following Monday. 

In this example, the consultant can be defined as an employee for a company, but is paying less tax due to their freelance status. Here, IR35 would be applied in order to ensure fair treatment to both employees and contractors. 

Within the healthcare sector, doctors, nurses, locums and other staff are supplied through intermediaries and therefore may need to review whether or not IR35 applies to them as well

How does IR35 affect contractors?

The new IR35 rules will have a significant impact on those who work through Personal Service Companies (PSCs), recruitment agencies and large to medium-sized clients within the private sector. 

Prior to April 2017 it was up to PSCs themselves to determine whether or not IR35 applies to them, but now that responsibility has been passed on to the end clients of their services, such as employment or recruitment agencies.

The responsibility to factor in income tax and National Insurance payments also falls onto the end-clients as well.

This is the same for public sector cases as well, only it is not just medium to large businesses/clients that are responsible.

Make sure you are not incorrectly categorised

In order to stay out of IR35 one must prove that you are not being treated the same as an employee is or would be. 

A list of differences should be kept in case proof is asked of you one day, and could consist of the following:

  • How do your or your contractors’ hours differ from a permanent employee? 
  • What is your pension arrangement? 
  • Are you afforded employee parking? 

The next step would be acquiring proof that one is conducting business for themselves, rather than for the company they are contracting under, and they service other clients as well. For example: 

  • Having your own website
  • Printing your own business cards
  • Listing your service in business directories

Contractors that can evidence they are working for themselves, that they have bought their own computer and office equipment, software licences, and other materials for fulfilling the terms of their contract would also be demonstrating that the business is their own. 

If you are concerned about yourself or the status of people who work for you, we recommend that you consult an accountant who is well versed in tax and employment law. 

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Article written by Maisie Violet Wicks, BA Hons, columnist for Private Practice Hub. Please contact newsdesk@privatepracticehub.co.uk for any inquiries, comments or corrections. 

References

A, C., 2021. IR35: HMRC updates rules on working through an umbrella company – ‘this is a good start’. [online] Express.co.uk. Available at: <https://www.express.co.uk/finance/personalfinance/1430400/ir35-hmrc-updates-rules-umbrella-company> [Accessed 9 June 2021].

Bradley, C., 2021. Self-employed warned of dire consequences from Rishi Sunak’s IR35 changes: ‘It’s a mess’. [online] Express.co.uk. Available at: <https://www.express.co.uk/finance/personalfinance/1430302/self-employed-news-rishi-sunak-ir35-changes-seiss-spt> [Accessed 9 June 2021].

Legislation.gov.uk. 2021. Companies Act 2006. [online] Available at: <https://www.legislation.gov.uk/ukpga/2006/46/part/15/chapter/1/crossheading/companies-subject-to-the-small-companies-regime> [Accessed 9 June 2021].

Macintyrehudson.co.uk. 2021. IR35 in the Healthcare sector. [online] Available at: <https://www.macintyrehudson.co.uk/insights/article/ir35-in-the-healthcare-sector#> [Accessed 9 June 2021].

Grant Thornton UK LLP. 2021. IR35 tax reforms: HMRC answers our questions. [online] Available at: <https://www.grantthornton.co.uk/insights/ir35-tax-reforms-hmrc-answers-our-questions/> [Accessed 9 June 2021].

GOV.UK. 2021. Understanding off-payroll working (IR35). [online] Available at: <https://www.gov.uk/guidance/understanding-off-payroll-working-ir35> [Accessed 9 June 2021].

Medacs.com. 2021. What IR35 means for locum healthcare professionals | Medacs Healthcare. [online] Available at: <https://www.medacs.com/ir35> [Accessed 9 June 2021].

Crunch. 2021. What is a Personal Service Company (PSC)? | Crunch. [online] Available at: <https://www.crunch.co.uk/knowledge/tax/what-is-a-personal-service-company/> [Accessed 9 June 2021].

Crunch. 2021. What is IR35? – A Simple Guide To Making Sense Of IR35 | Crunch. [online] Available at: <https://www.crunch.co.uk/knowledge/business-guides/ir35-guide/> [Accessed 9 June 2021].

www.contractorcalculator.co.uk. 2021. What is IR35? Does it apply to your contract?. [online] Available at: <https://www.contractorcalculator.co.uk/what_is_ir35.aspx> [Accessed 9 June 2021].

Crunch. 2021. Who Determines Your IR35 Status And Who Pays Employment Taxes? | Crunch. [online] Available at: <https://www.crunch.co.uk/knowledge/tax/who-determines-your-ir35-status/#end-client-responsible> [Accessed 9 June 2021].