When IR35 came into force throughout the UK in April 2000, it heralded the beginning of the end for workers receiving payments from a client via an intermediary - usually their own limited company - when the relationship with their client was such that had they been paid directly, they would have effectively been employees of the client. It was a piece of legislation that has since undergone various revamps.
In April 2020, IR35 is getting another facelift. IR35 changes are coming that will affect the private healthcare sector and it is important that you, as a private sector healthcare worker, understand what these changes are as they may well impact your salary and the tax and National Insurance that you pay.
What are the changes to IR35 and why are they being introduced into the private sector?
HMRC are making legislative changes targeted at those like you who provide their services as limited company contractors, known as Personal Service Companies. They believe that, for tax purposes, many of these individuals are essentially employees but, as HMRC refers to them, are “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.
As a result, when these changes take effect from April 2020 it is highly likely that your weekly “take home” pay will reduce as you will be paying additional tax and national insurance.
Many of you will be aware that exactly the same changes took place in the Public Sector in April 2017. The effect was that virtually all healthcare professionals contracting in the NHS are now taxed as employees.
What are the changes to IR35 in 2020?
It is obviously extremely important that you are aware of the IR35 changes and have the chance to prepare for them.
To put it simply, if you are deemed to be “caught by IR35” or “inside IR35” you are effectively considered to be an employee for tax purposes and taxed accordingly.
Conversely, if you are “outside IR35” you are deemed to be self-employed and payments can be made to your limited company without tax and NI being deducted. Of course, when your limited company then pays you as an individual, tax and national insurance (and, potentially, dividend tax) should be deducted.
From 6th April 2020, responsibility for determining whether the work you are carrying out is “inside IR35” (employed) or “outside IR35” (self-employed) will lie with Search’s end-client, i.e. the company to whom you’ll be contracting your services. The end-client will make that decision based upon a number of factors, such as whether they have control of what you do, where you do it, when you do it, or how you do it. If this is control they have, then you will probably be deemed to be “inside IR35” (employed).
Likewise, if you do not have the right to organise for someone else to do your work (and for them to be paid by your limited company) if you are unavailable, then you are also most likely to be classed as “inside IR35” (employed).
Finally, if you receive pay for your work even if that work falls short of expected standards, again you are likely to find that you are “inside IR35” (employed).
An example of how the IR35 changes will work
To provide an example in practice, let’s consider a contract window cleaner. Here, the client company does not control how the window cleaner does the work or 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, the client 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 end-client control, even if that control is dictated by documented processes. Additionally, there is unlikely to be any scope to find a substitute worker and the payment to the healthcare professional is not dependent upon the quality of the work or the completion of a task, it is based on the hours worked. As a result, the healthcare professional is likely to be “inside IR35” which means they are employed.
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 important that you recognise that, with effect from 6th April 2020, it is highly likely that as a healthcare professional, you will be deemed “inside IR35” and taxed accordingly.
So, what are your options following the IR35 changes?
There are a number of options a healthcare worker can take to carry on their work as normal whilst remaining compliant with the new legislative changes.
For starters, you can continue to be paid via your limited company, but the amount paid over to the limited company by Search will have tax and NI deducted. Keeping your limited company going might be worthwhile if you were to have the occasional assignment which is deemed “outside IR35”. However, you will not be entitled to receive employer pension contributions from Search as we will not be your employer, your limited company will be.
There’s also the option to become an employed “temporary worker” (known as an Associate) with Search. This will entitle you to statutory benefits such as employer pension contributions and statutory sick pay. As an Associate, you will be subject to normal tax and NI.
For certain healthcare providers it may be possible for you to become employed by an accredited Umbrella Company. In the case of Nurses and other more qualified healthcare professionals, for VAT reasons we will discuss at another time, the Umbrella Company route is likely to mean that you will be unable to work with many healthcare providers. You may believe that this makes the Umbrella Company option markedly less attractive. It should also be noted that Umbrella Companies will ordinarily charge you a fee of between £10 and £25 per week to process your pay.
For those workers who regardless remain interested in the Umbrella Company option, Search has an approved list of compliant Umbrella Companies which we can put you in contact with. It is important to stress the word “compliant”, as it is entirely possible that by April 2020 you will be approached by “non-compliant” Umbrella Companies (none of which Search will work with) promising all sorts of illegal methods of reducing the tax you pay.
It is strongly advised that you avoid working with such organisations. If they are non-compliant, at some point in the future, they are just as likely to disappear without paying you.
You may feel that, as a result of the changes, you would prefer to seek permanent employment. If that’s the case, we encourage you to speak to our permanent recruitment team at Search, who you can get in touch with here. They can help you to update your CV and offer you long-term career opportunities with the UK’s leading healthcare providers.
Ultimately, most healthcare workers will find they fall within IR35 because they are working under the supervision, direction and control of their employer and their job is the same as a permanent member of staff. Also, they have the right to substitute themselves if they can’t work and they will be paid even if their work falls short of expected standards.
If you would like further guidance on this, please do not hesitate to contact Search.