This article was first published by www.dentalreview.news on 11 October 2023.
IR35 has been around since 2017 and only now is it to apply to the dental profession. In order to appreciate the implications for the dental team, it is first necessary to have a quick run through the principles laid down by HMRC.
The off-payroll working rules
The off-payroll working rules make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would.
The rules apply if the worker who provides services to a client through their own intermediary would have been an employee if they were providing their services directly to that client.
Who the rules apply to
You may be affected by these rules if you are:
The client is the person who is or will be receiving the services of a worker.
A worker affected by the rules may provide their services through:
A PSC is not defined in law but typically is a limited company that a worker controls and has some interest in, through which the worker provides their services.
When the rules apply
The off-payroll working rules apply if a worker provides their services through their own intermediary (usually a limited company, often known as a PSC).
The person responsible for determining whether the worker is employed for tax purposes, depends on if the client is:
In most cases, the client will be responsible for determining the employment status of the worker. However, if a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.
Working through an umbrella company
The off-payroll working rules are unlikely to apply if you are employed by an umbrella company.
What happens if the rules apply
The party responsible for applying the rules must determine whether the worker is employed for tax purposes. You can use the check employment status for tax (CEST) tool (1) to help you make this determination.
A worker’s employment status for tax determines the taxes the worker and the deemed employer need to pay, depending on whether a worker is determined as employed or self-employed.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which are within the off-payroll working rules and some which are not. A contract for the purpose of the off-payroll working rules is a written, verbal, or implied agreement between parties.
If the rules apply, the client is responsible for determining the worker’s employment status for tax, and they should produce a status determination statement (SDS) including the reasons for their determination.
If the worker is deemed to be employed for tax purposes, the deemed employer must deduct Income Tax and employee National Insurance contributions from fees paid to the worker’s intermediary. Employer National Insurance contributions and Apprenticeship Levy, if applicable, must be paid to HMRC by the deemed employer
How will the rules affect the dental team
Under tax IR35 legislation which came into force on 6th April 2023, ‘dental associates’ may no longer be classified as self-employed. From 6th April 2023 businesses will be obliged to consider whether IR35 applies to their engagements with personal service companies.
This means an associate or hygienist can no longer determine their own IR35 status, and the person/department who hired them, will be the deciding authority instead.
The corporate dental groups rely on the status of associates to be self-employed. If upon HMRC scrutinising an associate’s status, they are unable to show that they are self-employed, they will be reclassified as employees and will no longer qualify for tax relief on expenses.
If an associate is deemed an employee, the practice will pay Class 1 National Insurance contributions and provide benefits to their ‘employees’ which will be costlier than the lower rate Class 2/4 national contributions for self-employed associates.
If HMRC decides that an associate is an employee, it is the owner of the practice – the ‘principal’ – who will be charged with the unpaid PAYE and employer’s National Insurance contributions.
It is now extremely important to look carefully at associate and hygienist agreements. In the case where an associate is deemed to be an employee, there will need to be contractual indemnity clause in relation to tax in favour of the principal, so the principal can recover this tax liability from the associate or hygienist.
Jonathan Jacobs is a corporate lawyer with extensive expertise in the healthcare sector. He focuses particularly on the commercial legal needs of dental professionals.