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This guidance has been prepared by BMA Law for the BMA. It is intended as a general overview of the law. It is recommended that specific legal advice is sought in individual cases.
What is IR35?
IR35 (also known as the 'intermediaries legislation') is an anti-tax avoidance measure introduced by the Government in April 2000.
It targets individuals who attempt to avoid paying employee income tax and national insurance contributions (NIC) by supplying their services through an intermediary (usually a 'personal service company') and paying themselves dividends.
A personal service company (PSC) is a company (or partnership) which is set up by a worker and whose business consists of selling the services of that worker to an end-user or client. The worker is usually a director of the PSC and exercises management and financial control over it.
The PSC may supply the worker's services either directly to the end-user, or via an employment agency which is paid by the end-user, and which in turn pays the PSC after deducting its fee for finding the work. The worker then draws a salary from the PSC or receives dividends as a shareholder.
The IR35 regime investigates the nature of the relationship between the worker and the end-user to determine whether, were it not for using a PSC, that individual would be considered as an employee or office holder (for example, a director) of the client.
Where an employment contract would have existed between the worker and the client in the absence of the intermediary, IR35 ensures that the income tax and NIC liability in respect of that worker is broadly equivalent to that of an employee.
It does this by imposing PAYE and NIC obligations on the intermediary, although from April 2017 those obligations transfer to the client where they are a public sector body.
IR35 rules apply across the UK. It is part of a wider body of anti-tax avoidance rules which may also need to be considered where individuals are supplying their services through intermediaries or agencies.
When does IR35 apply?
IR35 broadly applies when the following three conditions are met:
- An individual ('worker') personally performs services for another person or organisation ('client'), or is under an obligation to do so.
- The worker carries out the performance of those services under arrangements involving an 'intermediary', rather than under a contract directly between the client and worker.
- The circumstances are such that:
- if the services had been provided under a contract directly between the client and worker, the worker would be regarded as an employee or office holder of the client for income tax and NIC purposes.
- (for income tax purposes) the worker is an office holder under the client and the services relate to the office.
An intermediary means any person (including a partnership or unincorporated association of which the worker is a member) whose relationship with the worker meets certain conditions, depending on whether it is a company, partnership or individual, and from whom the worker (or an associate of the worker) receives, or is entitled to receive, directly or indirectly, a payment or benefit that is not employment income.
What are the consequences of IR35?
If IR35 applies, the worker is treated as an employee for income tax and NIC purposes. An approximately equivalent amount of income tax and NIC is payable as would have been if the individual was directly employed by the client.
Until 5 April 2017, it was the intermediary's obligation to:
- Determine whether IR35 applies
- If IR35 applies, deduct appropriate tax and NIC from any payments made to the individual.
From 6 April 2017 these obligations transferred to a public sector body (or recruitment agency where it uses one) which engages a worker through a PSC. For these purposes, a public sector body is defined as a 'public authority' under the Freedom of Information Act 2000 (or its Scottish equivalent), which includes NHS England, clinical commissioning groups (CCGs), health boards and NHS trusts, as well as GP practices providing GMS and PMS/section 17C services (but not other types of providers who do not provide those services).
In addition, the 5% allowance to be deducted for 'notional expenses' when calculating an IR35 liability is removed for PSCs operating in the public sector.
Where a public sector client or agency deems an individual inside IR35, it does not necessarily mean there is any change to their status in terms of statutory employment protection as IR35 rules only apply to tax and NIC. As long as the individual is working under a genuine contract with the PSC, they will not be considered an employee of the client or agency by an employment tribunal.
For non-public sector engagements the old rules continue to apply and so it is still the intermediary that is responsible for applying IR35.
How does IR35 affect doctors?
The application of IR35 is assessed on a case-by-case basis so the circumstances of each engagement must be considered individually in order to determine whether it is caught by the rules (or any other applicable rules).
Here are some examples of how it might affect locums and GP practices:
Example 1: A locum contracting directly with a client
A locum operating as a sole trader who contracts directly with a client (such as a GP practice or NHS trust) is excluded from IR35 as there is no intermediary. For such individuals the issue is purely one of employment status since they will still have to be genuinely self-employed in order to avoid paying employee tax and NIC.
Example 2: A locum contracting via an intermediary
Where a locum is contracting with a client or recruitment agency via an intermediary (such as a PSC), IR35 may apply.
From 6 April 2017 where a public sector body (including a GMS or PMS/section 17C practice) engages a worker to personally perform services under arrangements involving an intermediary, the obligation to determine whether IR35 applies and, if so, account for the relevant income tax and NIC will be on the public sector body (or agency if it uses one).
For non-public sector-engagements these obligations continue to be on the PSC.
Example 3: A locum contracting via an agency or chambers
A locum who works for a client via an agency could contract either directly with the agency, or via an intermediary (such as a PSC). IR35 potentially applies in both cases. In the former case, the agency itself could be classed as an intermediary, although this arrangement may instead be caught by another regime, known as the 'agency rules'.
IR35 may also apply where a locum works via chambers. However, this will depend on how the chambers are structured, and the particular contractual arrangements.
Application of IR35 without assessment of individual circumstances
The BMA is aware that some providers are applying IR35 as a blanket rule to all locum doctors whom they engage, irrespective of the individual doctor's circumstances.
Where a locum doctor is told by the provider it is engaged by that IR35 will apply without assessment of their circumstances, this statement from the BMA should be used to support the doctor's case.
NHS Improvement had had previously issued guidance to NHS and Foundation Trusts recommending that all individuals providing services through an intermediary should fall within IR35 and therefore, all locum, agency and bank staff would be subjected to PAYE.
The BMA wrote to NHS Improvement to seek clarification on this advice and we welcome that NHS Improvement has now published further guidance confirming that assessment of whether or not IR35 applies to an individual must be carried out on a case by case basis rather than by a broad classification of roles.
The BMA is also aware that some employers have made mention of locums breaching their GMC duty of care if they cancel shifts at short notice. The GMC position, in line with good medical practice, is that individuals should work their contractual notice. This will need to be determined on an individual basis. Please see our update on this issue.
Download the guidance
IR35 guidance (PDF)
June 2017 Update
In late May NHS Improvement announced its previous advice on changes to the so-called ‘IR35’ rules was ‘not accurate’. In its revised guidance, NHS Improvement states that the application of the rules to each locum, agency or bank worker should instead be considered on a ‘case-by-case’ basis rather than by a ‘broad classification of roles’.
This u-turn comes after BMA council chair Mark Porter in April urged NHS Improvement to ‘urgently clarify’ its original guidance on IR35 after members warned that trusts were applying its advice ‘unilaterally’.
Read the blog
A locum’s guide to the changes to IR35 legislation
The BMA can provide initial support for members with IR35. See our advice on employment status
HMRC has published guidance on IR35 and launched a new online employment status service tool to obtain its view of whether any current and prospective workers would fall within the new off-payroll rules.
HMRC has stated that it will stand by the result its service produces unless it is based on inaccurate information. Where artificial arrangements are created in order to achieve
a particular outcome from the service HMRC will treat it as evidence of deliberate non-compliance which may attract higher penalties.
If you remain unsure whether IR35 applies, you should consider seeking expert advice. BMA Law offers legal advice at discounted rates for BMA members