Self-employed Associates and IR35
Update from David Davies of TW Accountants on changes in IR35 and the way the rules are applied
You’re self-employed, or at least you think you are! But for thousands of podiatrists who either work as self-employed Associates, or who own a practice but use self-employed Associates, HMRC has clarified how it decides on your employment status and so you may not actually be classed as self-employed for tax purposes by HMRC, unless you take certain steps to make certain you are.
If you own a practice, then you would normally either have employees; or Associates who are self-employed; or a mix of the two.
If you are a self-employed Associate, you will be working on your own account and bearing the costs of your business yourself. You will not be under the direction and control of an employer and your contractual arrangements will make clear that they are a Contract for Services and not a Contract of Service. In such an arrangement it is for you to decide how your work is done and for you to have the power to have someone perform the work on your behalf if you chose. This is often referred to as a Substitution clause.
Whether you work as a sole trader or use a limited company, you must be classed as self-employed for tax purposes to be able to offset a proportion of your business expenses against tax and avoid paying the additional tax that would be paid if you were an employee.
However, HMRC often audits self-employed people, including podiatrists, to check whether they are actually self-employed for tax purposes, and this could become far more common in the future.
Changes in IR35 rules
There has been significant press coverage of the recent changes around the IR35 rules that came into place in April 2021 and there have been further changes to those rules in recent budgets. IR35 relates specifically to those who operate as self-employed but through intermediaries, which in most cases means a limited company. But IR35 might prove to be just the tip of the iceberg and in most cases, IR35 itself is not directly relevant to those in the podiatry sector.
However, HMRC is now applying the same rules it uses to decide whether someone using a limited company is actually employed or self employed for tax purposes, to Britain’s nearly five million self-employed sole traders, and it looks like it is going to be very active in this area over the next few years.
HMRC is looking at sole traders who effectively operate within someone else’s business, (like Associates do), but do so in much the same way as an employee would. These are often referred to as the false self-employed.
Check your employment status for tax purposes
HMRC has introduced a Check Employment Status for Tax (CEST) tool on its website, which engagers (practice owners) and workers (Associates) should ideally be using to check either their own employment status, or the status of those they engage on a self-employed basis.
HMRC’s CEST tool will give you one of three results: “employed for tax purposes”, “self-employed for tax purposes”, or “We can’t determine the status of this engagement”. Unless the tool states that the worker is “self-employed for tax purposes”, then as far as HMRC is concerned, they’re not! If it says “we can’t determine the status of this engagement”, this will require a conversation with HMRC who will almost certainly prove the Associate is actually “employed for tax purposes”.
If an Associate is found to be “employed for tax purposes” HMRC will demand payment of the extra Income Tax and National Insurance that should have been paid by the Associate, and the 13.8% employers National Insurance that should have been paid by the practice on the gross fees paid to the Associate. HMRC will almost certainly add the minimum 35% penalty to the amount due (although it can be up to 100%), and an interest charge, and HMRC have stated that they are now backdating these liabilities.
HMRC also has the legal power to transfer the entire tax and penalties owed by the Associate, on to the practice, leaving the practice potentially having to sue the Associate personally in order to recover their losses. However, Associates could easily find themselves having to pay both their own liabilities and that of the Practice in which they work, as many contracts actually include clauses that indemnify the Practice against any additional tax costs in the event the Associates self-employed status is challenged and overturned by HMRC.
It would seem few accountants looking after podiatrists are aware of the issue. In a number of cases, members have been told by their accountants that IR35 doesn’t affect them as they or their Associates aren’t operating through a limited company. This is technically correct, because IR35 only applies to those using an intermediary, which is what a limited company is.
However, these Accountants appear to have no idea of the wider implications of how HMRC is applying these rules to sole traders.
Right of substitution
For all practice owners and Associates, it is essential that the contract between the Practice and Associate is clear that it is a self-employed arrangement, and that actual practice reflects the self-employed nature of the work. A key indication of the Associate’s status as “self-employed for tax purposes” is the inclusion of the Right of Substitution in the Associates contract and evidence that such a clause has been used. However, this must be done in exactly the right way. There are several tests around its use and if you fail to pass every one of the tests, HMRC will disallow it and classify the Associate as “employed for tax purposes”. Once you understand the rules and both why and how HMRC is applying them, it’s actually easy to use the Right of Substitution in the correct way, but bear in mind HMRC will check very carefully to make sure every single rule has been adhered to.
The College, in conjunction with David Davies of TWD Accountants, the College’s preferred Accountancy Service Provider, runs a quarterly webinar specifically on this whole issue. David also provides private consultancy sessions for those members who want to fully understand how to implement and use the Right of Substitution in the correct way. Webinars are run regularly, and you can see the current events on the College's listing on Eventbrite.
For further details on private consultation sessions, contact David Davies on 07775 920 927.
David Davies at TWD Accountants will be speaking about this subject at the Royal College of Podiatry’s Annual Conference at the ACC Liverpool on 23-25 November 2023.