It is not uncommon for pharmacies to engage locums who provide their services via a personal service company (PSC). This means the locum is employed or engaged by their own company and not the pharmacy itself, and is an arrangement that tends to be tax-driven.
However, the off-payroll working rules – commonly referred to as IR35 – are intended to ensure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure within which they work. Is your business getting it right?
Recent consultation and proposed changes
In 2018, in an attempt to clamp down on the use of PSCs as a means of tax avoidance, HMRC wrote to pharmacy business owners prompting them to audit the tax employment status of their staff. Continuing a wider campaign to increase compliance with IR35, the 2018 Autumn budget announced the extension of rules from the public sector to medium and large businesses in the private sector with effect from 6 April 2020. Small companies as defined in the Companies Act 2006 will be exempt from the new rules.
Currently, it is the responsibility of the locum’s PSC to determine whether the off-payroll working rules apply; essentially, it is down to the locum themselves to make this determination and take advice, as appropriate. However, the government is proposing to shift the burden of making that determination to the end-user instead. In practice, this means that from 6 April 2020 pharmacies engaging locums via a PSC will be required to make a determination of the locum’s employment status for tax purposes.
Pharmacy owners will, therefore, need to consider whether, if the pharmacy business ignores the PSC altogether, the working relationship with the locum is akin to an employment relationship. If so, the pharmacy will be required to treat the locum as an employee and make the necessary deductions for tax and employee NICs and employer NICs via PAYE, rather than leaving it to the locum’s PSC. The pharmacy will also be responsible for communicating this determination of status directly to the locum.
There is the potential for disputes with locums as determining an individual’s employment status is not straightforward. Whilst the government intends to introduce a framework for resolving disagreements over status determinations, these changes are not designed to affect those locums who are legitimately self-employed and provide their services via a PSC. The proposed changes are intended to ensure that those who work like employees are taxed like employees. Pharmacy business owners will want to ensure that their locums’ status is determined correctly because, if they get it wrong under the new rules, the pharmacy will be responsible for any unpaid tax, NICs, interest and penalties, rather than the locum’s PSC.
The government produced the policy paper and consultation document ‘Off-payroll working rules from April 2020’ and consulted on its proposals. This consultation sought input on how best to implement the proposed changes in the larger, more diverse private sector and closed on 28 May 2019. We now await HMRC’s publication of a full summary of responses to the consultation, which will inform the draft Finance Bill, which is intended to be published this summer.
In the meantime, pharmacy business owners should consider taking the following steps to prepare for these changes in advance of April 2020:
- Identify locums who are engaged through PSCs.
- Use HMRC’s online tool ‘Check Employment Status for Tax’ to check locum arrangements, but with caution as this service relies on being fed accurate information and it may be appropriate to take additional advice.
- Put processes in place to determine if the off-payroll rules apply to future engagements and review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if any changes need to be made.
The Budget 2018 brief confirmed that HMRC will not carry out targeted campaigns into previous tax years if individuals start paying employment taxes under IR35 for the first time, and businesses’ decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years. However, bear in mind that any change to a locum’s employment status from a tax perspective could have employment law implications. For example, if you concede that a locum has historically been an employee from a tax perspective, the locum could assert that they have accrued employment rights, such as protection from unfair dismissal.
The cost of non-compliance with the off-payroll working rules in the private sector is estimated to reach £1.3 billion a year by 2023/24; therefore, IR35 compliance is not an issue that is going to be ignored in the Brexit fray.
Do not assume that because locums are providing their services via a PSC, this is compliant from a tax and employment status perspective as unfortunately, it is never quite that simple. Now is the time to review these arrangements to ensure that your business will not be under the HMRC spotlight.
The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article you should contact Becky Lawton who is a Solicitor and member of the Pharmacy Transactions Employment Team at Charles Russell Speechlys LLP. Becky can be contacted on [email protected]
This article also appears in the August issue of Pharmacy Business.