As of 6th April 2020, significant changes will be coming into play for the IR35 tax legislation. It is vital that you, as a private sector healthcare company, understand these as the responsibility for setting IR35 status will be passed from contractors to the medium and large private sector companies that engage these workers.
Why are IR35 changes being introduced into the private sector?
HMRC are making legislative changes targeted at those who provide their services as limited company contractors, also known as Personal Service Companies. They believe that, for tax purposes, many of these individuals are actually employees or, as HMRC refers to them, “disguised employees”. The purpose of these legislative changes is to ensure that the earnings of those “disguised employees” are taxed in exactly the same way as any other employee.
HMRC has been very clear that, in their view, the vast majority of healthcare professionals currently providing their services through their own limited companies fall into this category.
Many of you will be aware that exactly the same changes took place in the Public Sector in April 2017. The changes meant that virtually all healthcare professionals contracting in the NHS were now taxed as employees.
What are the changes to IR35 legislation in 2020?
It is obviously extremely important that you are aware of the IR35 changes and have the chance to prepare for them.
If one of your contractors is “caught by IR35” or “inside IR35” they are effectively considered to be an employee for tax purposes and taxed accordingly. Conversely, if they are “outside IR35” they are deemed to be self-employed and payments can be made to their limited company without tax and NI being deducted.
From 6th April 2020, responsibility for determining whether the work your contractors are carrying out is “inside IR35” (employed) or “outside IR35” (self-employed) will lie with you and this is an assessment that you should currently be doing.
To help you make that decision, you need to consider a number of factors, such as whether you have control of what your contractor does, where they do it, when they do it or how they do it. If this is control you have, then it is likely they are “inside IR35” and therefore considered to be employed by you.
Consider whether your contractor has the right to arrange for someone else to do their work (and for this substitute worker to be paid by the contractor’s limited company) if they are unavailable. If they don’t have this right, then they are again most likely “inside IR35”, and deemed to be employed by you.
Think about whether you pay your contractor even if their work falls short of expected standards. If you do, then, once again, they are probably “inside IR35” and would be classed as being employed by you.
A working example of IR35 in action
To provide an example in practice, let’s imagine you own a window cleaning business and contract third party window cleaners. Here, you have little to no control how the window cleaner does the work, when they do that work and the window cleaner can substitute themselves with another worker if necessary. As the window cleaner is paid according to the windows cleaned and not the time it takes, if the standard of cleaning is poor, you can ask the window cleaner to complete the work to a higher standard at no extra cost.
As a result, the window cleaner is likely to be “outside IR35” which means they are self-employed.
This contrasts with a healthcare professional who will be subject to your control, even if that control is dictated by documented processes. There is unlikely to be any scope for a healthcare contractor to find a substitute worker to fill in for them. The payment to the contractor is not dependent upon the quality of the work or the completion of a task, it is based on the hours worked. Therefore, the healthcare contractors are likely to be “inside IR35” which means you will be expected to be employing them.
Again, it is important to stress that HMRC has already stated that, in their view, for tax purposes, most healthcare professionals are employees and should be taxed as employees.
Taking all of this on board, it is essential that you recognise that, with effect from 6th April 2020, it is highly likely that all self-employed healthcare professionals, will be deemed “inside IR35” and taxed accordingly.
So, how can you make sure your business is ready for the IR35 changes before 2020?
Budget for the change - HR should work with other departments including finance, procurement and legal. It is likely that existing agreements between the business and your contractors have notice periods. It is important to find out whether these contracts include tax indemnities as a fall back and whether you need to introduce any further due diligence when engaging with a contractor, PSC or agency.
Consider pay rates - Whilst blanket assessing everyone as “inside IR35” would effectively eliminate the tax risk, it is not deemed to be compliant. Furthermore, businesses that take this option may have to increase their pay rates to compensate for the reduction in contractor take-home pay. This could lead to businesses experiencing problems in retaining contractors and attracting them in the future.
Undertake a wider assessment of business needs - Think about what skills you as a healthcare business need and where you require flexibility. Some companies are finding they’ve had contractors for 20 years doing the same job. It is now time to reflect and consider if you should really be employing these people full-time.
The challenge lies in mitigating these risks, but also retaining the flexibility to scale up and down when needed. You’ll need to think about what contingencies need to be in place should contractors object to your determination that they fall “inside IR35” and leave as a result.
Train your employees to make accurate IR35 status determinations – Gather as much information as possible from which to make an IR35 status determination. Be thorough in your approach; businesses need to be able to show they have taken reasonable care in their assessments. HMRC will look at the size of the business, and if you have significant human and financial resources, they’ll expect you to have really put some time, effort and cost into getting this right.
Implement a status disagreement process compliant with HMRC’s requirements – Ensure your contractual terms include a dispute resolution process and that it is clearly communicated to agencies and contractors.
Bringing the IR35 changes all together
Ultimately, most healthcare workers will fall within IR35, the reason being that they are working under your supervision and the direction and control you have over their professional duties is the same as if they were a permanent member of staff. They also possess the right to substitute themselves if they cannot work and you must pay them even if their work falls short of expected standards.
If you would like further guidance on this or if you have any queries, please do not hesitate to contact Search.
Alternatively, you can register for our informative Search Healthcare seminars about the new IR35 changes coming into play for private healthcare companies in 2020.