Self-employed Associates - are you prepared?

sole traders
self-employed for tax purposes
IR35 blog
David Davis of TW Accountants discusses 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 changed its rules so you may not be able to be self-employed for tax purposes unless you do certain things.

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 contact on your behalf if necessary. This is often referred to as a Substitution clause.

If you are a self-employed Associate, whether you work as a sole trader or have a limited company, you are probably classed as self-employed for tax purposes. This means that you are able to offset a proportion of your business expenses against tax.

However, HMRC often audits self-employed people, including podiatrists, and this could become 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. 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.

HMRC is now applying the same rules 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 for sole traders who effectively operate within someone else’s business, (like Associates do), but they 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 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 two results: “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! This will require a further conversation with HMRC who will almost certainly prove the Associate is actually “employed for tax purposes”.

If you are 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 the law allows them to backdate this if they wish. Although they have not done so currently, they could start doing so at any time.

HMRC also has the legal power to transfer the entire tax and penalties owed by the Associate to the practice, leaving the practice having to sue the Associate personally in order to recover their losses.

It would seem few accountants looking after podiatrists are aware of the issue. In a number of cases, members have been told by accountants that IR35 doesn’t affect them as they or their Associates aren’t operating through a limited company. Accountants appear to have no idea of the wider implications of how HMRC is applying these rules to sole traders. Unless the Associate is working within a business deemed as Medium or Large-sized by HMRC’s criteria, and there are very few podiatry businesses that would fit this description, then it is the Associate’s legal responsibility to determine their status (ideally using HMRC’s own CEST tool) and then inform their client (the practice). However, if the Associate gets it wrong, or doesn’t do it, it’s the practice that’s going to end up with by far the biggest bill and penalties.

Right of substitution

For all practice owners and Associates, it is essential that the contract 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 tests around its use and if you fail to comply with 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 very easy to use the Right of Substitution in the correct way. If you decide to use it, bear in mind HMRC will almost certainly check very carefully to make sure every single rule has been adhered to.

Further information

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 Davis at TWD Accountants will be speaking about this subject at the Royal College of Podiatry’s Annual Conference at the ACC Liverpool on 18-20 November.