How does the recent changes to IR35 impact the healthcare sector?
Richard Maitland · July 14th 2023 · read
‘IR35’ is shorthand for the employment tax legislation governing the use of ‘intermediaries’. HMRC also refers to these as the ‘off-payroll working’ rules. Recent changes to IR35 have had a major impact on the healthcare sector.
I hear the term ‘PSC’ used a lot in connection with IR35 – what does that mean?
An IR35 intermediary is usually a ‘personal service company’ (PSC), a limited company owned by the individual providing the services. Other entities such as partnerships can also be IR35 intermediaries, but PSCs are by far the most prevalent, so we refer to PSCs throughout this discussion.
An IR35 ‘end client’ is the organisation engaging the services of the individual via the latter’s PSC.
What is the basis for IR35 and why is this so important?
IR35 is underpinned by the key concept of employment tax status. This status determines whether, for tax purposes, an individual is genuinely self-employed (can be paid gross) or is more like an employee (should be paid subject to PAYE tax and National Insurance Contributions).
The employment tax treatment of payments will often be of key interest and importance to the parties.
Whether genuine self-employment exists depends on the application of a range of case law status tests, all of which must be considered ‘in the round’. These tests include but are not limited to:
- Who controls the ‘what, where, when, and how’ of the services?
- Does the individual providing the services have a right to send someone else in their place (substitution)?
- What level of financial risk does the individual have?
- Are they ‘in business on their own account’?
Hasn’t IR35 changed recently? I’ve heard that end clients now have more compliance obligations.
The IR35 rules have been around for more than 20 years. Major recent changes first took effect in the public sector from April 2017 and were then extended to the private sector from April 2021, with other new changes introduced at the same time.
An IR35 end client must now make an employment tax status assessment of the individuals who provide their services to it via PSCs, applying the case law status tests.
If ‘but for’ the PSC the individual would be an employee of the end client, the end client (if it pays the PSC) must operate PAYE / NIC, including employer’s NIC – this is ‘inside IR35’.
If the end client assesses the underlying relationship to be one of genuine self-employment, then the PSC can be paid gross on a business-to-business basis, without accounting for PAYE / NIC – this is ‘outside IR35’.
The end client must also issue a written status determination statement (SDS) notifying the parties of its assessment.
Some organisations are exempt from the new IR35 rules, including if they are a ‘small’ company under the audit rules, or if they are ‘wholly overseas’ from the UK, or if they receive a ‘fully contracted-out service’ rather than simply a supply of labour.
These exemptions only apply to organisations which would otherwise be IR35 end clients, they don’t cover the PSC or the individual. Deciding whether any of these exemptions apply needs to be looked at carefully and in detail.
Why is IR35 relevant to the healthcare sector?
Many healthcare professionals provide their services via PSCs, meaning that the healthcare organisations engaging these professionals need to fulfill their new IR35 compliance obligations.
In many cases, the healthcare professional will have a high level of personal control over how their specialist services are delivered, with the corollary being that control by the engaging organisation is more limited. This can be an important indicator of self-employment.
However, each IR35 employment tax status assessment should be based on a holistic view of the status tests in the context of the specific circumstances of the engagement.
Employment tax status can be a subjective area, so the parties may have different views on the IR35 position. It’s important to consider how these can be reconciled in the event of any dispute.
What’s happening with IR35 enforcement?
HMRC enforces IR35 alongside other employment tax areas, or through standalone IR35 reviews.
HMRC has recently made headlines from its IR35 reviews of other government departments such as the DWP, Home Office, and Defra, with backdated PAYE / NIC liabilities running into the tens of millions of pounds on each review. It does seem that HMRC is targeting the ‘lowest hanging fruit’ with these reviews, although arguably it is prioritising them because the new IR35 rules have been in force in the public sector for six years at the time of writing, as opposed to two years in the private sector.
Healthcare organisations and professionals can therefore expect HMRC to ramp up its IR35 compliance efforts in the private sector, whilst continuing strongly with its public sector compliance activity.