Supervised locums to face increased taxes
Payroll expert Merin Yilmaz warns of tax changes coming in April which will affect taxes and expenses for locums being supervised
Published on 18th February 2016
Are you directly supervised in your role as a locum? If so, your tax and expenses will change and your self-employment status could be affected, writes Merin Yilmaz, payroll expert in her latest viewpoint blog.
With the new financial year and the new budget being released on the 6th April 2016, we predict that by 2017 the HMRC will phase out limited companies for contractors completely.
The new legislation is just the beginning of the end for Personal Services Companies (PSC). The limited company market will slowly deteriorate to nothing by 2017. The HMRC are making PSC's useless, they are sticking to their guns and are determined to continue with IR35 which asks contractors whether they are genuinely self-employed or under the supervision, direction or control (SDC) of anyone in their role.
Further SDC tests are being incorporated that will make it a useless model of payment - especially with their new IR35 online tool coming out.
The HMRC has a plan to launch an online Employment Status Indicator to test contractors’ IR35 Status. HM Revenue & Customs said its aim was to have a beta version of an “IR35 specific ESI tool” by spring 2016. Their hope is for the tool to provide “clearances” on status.
What is IR35 and does it affect me?
Essentially, IR35 affects all contractors who do not meet HMRC's definition of 'self-employment'.
The IR35 rules will result in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future. Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I.), following deductions for expenses. Income will be in the form of a 'deemed payment', following these deductions.
Do I pass the Big 3 IR35 tests?
If you are self-employed or run your own company, you need to ensure your contract covers the ‘Big 3’ tests of self-employment (as well as having your own public liability and other insurance) which can be summarised as follows:-
Are you being directed by someone? Do you have a line manager to report to?
• Can you actually send in a substitute? Do you have the right to send a substitute to work and pay them? If you cannot personally send in a substitute then you are inside of IR35 and will no longer be allowed to operate this way.
• Do you have the right to decide where/when and especially how to do your work?
• Do you have the right to refuse work offered to you?
If you say no to any one of the above questions, you are not genuinely self-employed in HMRC’s definition and should not be a director of your own company, nor be paid in this way.
The HMRC has drastically reduced the dividend rate, and if contractors do not pass the IR35 test, you cannot pay yourself in dividends and therefore will just be operating under a normal PAYE tax system within your own company. The new rules set out will make it technically impossible for the contracting market to pay themselves in dividends and so locums will be worse off than being PAYE after April 2016.
The discussion on the 15th December at the IR35 forum can be read in detail here.
HMRC plans to have an IR35 specific ESI tool which will act as an online tool for people remotely.
Once this is fully implemented, the existing Contract Review Service (CRS) will be aligned with the wider HMRC approach to providing clearances.
HMRC are looking to increase the number of customers it can reach, support and provide certainty to. Although some members felt that some form of transfer of liability to the end client might be inevitable, opinions on how this should be achieved differed. So the HMRC appears to now be taking definitive action against people operating falsely as self-employed under their limited companies and tax liabilities can and will fall into the end client to pay any penalties if they cannot catch the Director of the company. This could be the end client or even recruitment agency that will be left to potentially pick up the bill.
There will be a growing concern and it is happening already where we have seen many agencies refusing to pay into a PSC. A few councils and hospitals are also jumping on the band wagon and only allow contractors to be paid PAYE or through an Umbrella (Employment Solution). If everyone follows suit, as everyone is afraid of the third party debt, they know that social workers or health workers will not be able to pass the IR35 test and they will not allow them to be pay rolled via that solution and eventually it will be phased out.
Compliance with the IR35 rules would cause problems because of the link to IR35 in the travel and subsistence changes for people working through intermediaries being introduced from April 2016
People with their own PSC will have to supply the result from a new ESI test, which is going to be revamped to include SDC, PSCs will then use the ESI test result [if it’s an 'outside' IR35 outcome] as proof that they can continue contracting as a PSC, assuming they’re not a Managed Service Company. Under the system that the source envisages, HMRC would “record the individual reference numbers of ‘IR35-caught’ responses that the revamped ESI throws out”.
If you have any concerns around IR35 or your personal services company, Payerise are happy to take any calls and assist the contracting marketplace in any way they can in relation to ending their self-employment if they believe they will not meet the IR35 criteria and thus be deemed ‘falsely self-employed’. Now is the time to act and wind down your limited company and opt for a compliant option of employment.
All questions and concerns can be emailed to firstname.lastname@example.org or call our Welcome Team on 07715902123 or 07508519550.
This article was written by Merin Yilmaz, director of Payerise.
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