The 2020 IR35 reform: what you need to know…

The way we work in the UK is set to change drastically during the coming years.

From Brexit and near-constant shifts in Government to a trend towards contracting/locuming and gig work, the generally accepted forecast is that our current methods of doing business will be entirely different in a decade – maybe even less.

The IR35 reform is one of these changes, and it’s expected to impact private sector contracting. As seen in the public sector off-payroll working reform of April 2017, some professions will feel this revised legislation more than others. Locum vets are likely to be among them.

What is IR35?

Let’s start with the basics. Most contractors and locums, at this point, will have at least heard of IR35, or “the off-payroll rules”, yet a concerning number still aren’t fully aware of what the legislation means for them.

Some context may help; locum vets are contracted by practices, but they are engaged and paid through their own limited companies. A limited company is the intermediary between the locum vet and the practice – the client – which means a locum isn’t providing his or her services directly.

Each has a contract for services, as opposed to a contract of employment, and is, therefore, exempt from paying income tax or national insurance contributions (NICs).

However, locums don’t receive employee benefits like holiday or sick pay, and must cover their own overheads, such as equipment, scrubs and travel. This tax relief allows them to set aside enough money to pay for such overheads, as well as save for time off and pension contributions.

The purpose of IR35 is to identify individuals who are abusing the system to avoid paying tax. IR35 targets contractors, freelancers and any self-employed person who is perceived to be taking part in tax avoidance through the use of a personal service company (PSC), or similar.

If you are found to be inside IR35, HMRC has determined you’re a “disguised employee” and you should be paying income tax and NICs.

What’s changed?

While the original purpose of the legislation is a fair one, the aggressive methods adopted by HMRC when identifying so-called “disguised employees” have been heavily criticised. Despite various amendments to IR35 over the years, successive governments have claimed too many limited company owners are still illegitimately working outside the rules.

As a result, new off-payroll rules were implemented in April 2017 for contractors working for public sector organisations. In the 2018 Budget, it was announced the same rules would be extended to the private sector. Instead of contractors themselves being responsible for determining their IR35 status, this obligation has been handed to the engager of each contractor, that is, the end client.

Where an end client deems the contractor to be inside IR35, they must deduct NICs and income tax from the contractor’s pay as if he or she was an employee. However, the contractor still won’t receive employee benefits or rights, despite paying an increased tax rate.

Unfortunately, the tools and information required for clients to make an informed choice have been widely criticised (particularly the online check employment status for tax [CEST] tool), and given the penalties for making an incorrect employment status determination, some clients have opted to make blanket IR35 decisions.

Much of the same can be expected when IR35 is introduced to the private sector. It’s been noted the private sector is much more diverse in its nature and so the tools already unfit for use in the public sector will be even less appropriate in April 2020.

How could locum vets be affected?

Whether a locum should be inside or outside IR35 is measured against three status tests. These are:

Control: Is it you, or is it your client, who controls your work? If your client has a say in certain aspects of your working life, it could be viewed as more of an employer – placing you inside IR35. Provided deadlines are met, genuine contractors should have the freedom to complete their deliverables without being managed.

Right to substitution: If you hired a plumber, would you care if the exact plumber you’d spoken to completed the job, or would you be happy with any qualified plumber carrying out the work? The general consensus is as long as the job gets done, it doesn’t matter who does it. That is the right to substitution, which has long been seen as pivotal when demonstrating that a contractor is outside IR35.

Mutuality of obligation (MOO): Do you expect your client to give you consistent work? Perhaps you feel like you can’t turn down a job from a regular client? If there’s an ongoing obligation to provide or produce work from either side, that’s a MOO. Work should be provided and accepted on a project basis, as opposed to rolling tasks.

Like locum nurses in the public sector, these tests don’t apply well to the nature of locum veterinary work. Locum vets are often restricted to certain times when they can perform their services, for example, and must work around their engager’s schedule when treating animals. Unfortunately, HMRC has not proven itself reliable enough to carry out the aforementioned tests with the common sense and flexibility needed in such cases.

What can locums do to protect themselves?

Luckily, locums can take measures to protect themselves should they fall foul of an IR35 investigation. Small changes could make a big difference.

Turn down small tasks that aren’t specified in your contract for services, avoid any long termination clauses, ensure you’re supplying your own scrubs, make an effort to wear a badge or lanyard that identifies you as a locum in the workplace, and avoid accepting employee benefits like paid-for perks. The line between contractor and employee is easily blurred, especially with a regular client.

Andy Vessey, head of tax at Larsen Howie, specialises in IR35 rulings. He said: “Much of protecting yourself from an IR35 investigation is common sense. Don’t take part in a work appraisal, don’t accept payment for time off sick or annual leave and don’t start contracting for a former employer immediately after making the change.

“Avoid anything that would make you a typical employee of a company – HMRC will be looking for you to prove you’re not an employee.”

More about HMRC’s determination process is available online (https://bit.ly/2warADT) to help everyone prepare for the April 2020 changes.

While genuine contractors should have nothing to worry about, off-payroll investigations can be notoriously subjective; it’s highly advisable that you have a professional contract review carried out by a company that specialises in IR35 and consider IR35 insurance for full protection against an enquiry.

HMRC has now published the draft legislation for IR35 reform in the private sector, which details plans to make medium and large companies responsible for determining the tax status of the contractors they engage from 6 April 2020.

Released as part of the draft Finance Bill, the draft legislation outlines HMRC’s specific intentions for these often misunderstood tax rules which, if administered incorrectly, can carry penalties of hundreds of thousands if not more than a million pounds.