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From 6 April 2017, the legislation known as IR35 – which affects how people work through limited companies – is changing. The rules and implications are complex. I have attempted to answer some of the frequently asked questions below.
What is IR35?
IR35, or intermediaries legislation, is anti-avoidance tax legislation brought in by then-chancellor Gordon Brown in 2000. Its purpose is to prevent ‘disguised employment’, in which a worker receives payment from a client through an intermediary such as their own limited company, but whose relationship with the client is such that had they been paid directly then they would be employees of the client.
Prior to IR35 being introduced 17 years ago, a worker could work in the exact same job as a salaried employee, but could make significant tax savings by having the payment paid to their company, which they then draw dividends from.
What is changing on 6 April 2017?
Up until 6 April, it is the responsibility of the intermediary (eg, the worker’s limited company) to assess whether the worker falls inside or outside of IR35 and if deemed to be inside, then to apply the appropriate tax and NI (national insurance).
As of 6 April, with regard to public sector body engagements, it will be the responsibility of the organisation engaging the worker (the engager) or the agency (if they use one) to assess this, and if the worker is found to be inside IR35 then the engager/agency must apply tax and NI deductions at source.
Importantly, the criteria for assessing whether an individual operating through an intermediary falls foul of IR35 will not change on 6 April. Hence, if a worker has been working safely outside of IR35 through their limited company and not falsely declaring themselves as such, then nothing should change, apart from responsibility for due diligence shifting away from the worker.
Who is affected by this change in legislation?
It is important to note that not everyone is affected by this change. Firstly, only the public sector is affected. The private sector process remains the same. Secondly, not all of the NHS is affected. The legislation specifies that this applies to ‘public authorities’ which are defined by the Freedom of Information Act 2000. In the NHS, those authorities are:
It is only when one of the above organisations is engaging the worker through an intermediary that the new IR35 rules need to be applied. This means that APMS providers are unaffected, as well as private commercial providers who are contracted to provide NHS services such as some out-of-hours services, walk-in clinics and urgent care centres.
How is IR35 status assessed?
A full explanation of how IR35 status is assessed is contained within the new BMA guidance which also contains a link to the HMRC online tool to help you calculate IR35 status.
Once an engager/agency has assessed me, do they have to do it again?
HMRC guidance is that for each individual engagement, the engager/agency must assess the IR35 status of the worker and if necessary take the appropriate action.
I work directly for practices as a sole trader, does this apply to me?
No. As there is no intermediary between you and the client, you are excluded from IR35. In this case, the issue is solely with regard to employment status.
I get my work through an agency, does this change apply to me?
If you work as a sole trader via an agency, then IR35 needs to be considered, as the agency could be considered an intermediary. If you work via an agency through your own limited company, then IR35 still needs to be considered even though there is more than one intermediary between you and the engager. In both cases, the responsibility for assessing whether IR35 applies and applying appropriate tax and NI lies with the agency, rather than the public sector body.
The engager is a Federation or other such local organisation, are they affected?
The legislation is clear that this change applies only to ‘public authorities’ defined as such by the Freedom of Information Act 2000. Federations are not listed by that legislation as public authorities, so are not caught by this new legislation. Nor is any other organisation or entity which is not listed as such by the Act.
What must an engager/agency do if the above tool says the locum is inside IR35?
If the above tool says the worker falls inside IR35 for this engagement then they should be paid through the organisation’s payroll and tax and NI deducted at source. As an employer, the engager/agency will also then have to add 13.8% employer NI for all earnings above £156 per week in line with HMRC NI bandings. They would also have to generate payslips and a P60 end-of-year certificate for the worker as appropriate.
The locum is also free to only accept the engagement subject to satisfactory employment terms, which would need to be negotiated.
What are my options if an engager/agency deems me inside IR35?
If a locum operates through a limited company then they have several options:
What happens if an engager/agency wrongly deems someone outside IR35?
Should HMRC carry out an IR35 investigation of the organisation, at any point in the future, then any engagements deemed outside IR35 when they are in fact inside would mean the engager/agency would be liable to pay any taxes and NI due to HMRC as well as penalties. These taxes could be clawed back as far as 6 April 2017.
What happens to me as a locum if I am wrongly deemed to be outside IR35?
As far as HMRC is concerned, nothing. Liability would lie solely with the engager, or the agency if there is one, unless a specific indemnity arrangement is in place to compensate any liability which may befall the engager/agency.
Can an engager/agency deem all workers inside IR35, just to be safe?
There is nothing to prevent an engager/agency from attempting this. However, HMRC guidance makes it clear that each engagement should be assessed individually and the above HMRC tool applied. Blanket policies by engagers or agencies do not comply with this. A worker is free to raise this with HMRC. However, given that wrongly deeming someone as an employee could result in more tax generated rather than less, it seems unlikely HMRC would take a harsh view. HMRC have said they will stand by any result their tool produces, providing the tool hasn’t been manipulated to produce the result desired.
Although adopting such a blanket policy may mitigate future tax risk, the engager would then see a rise in their costs as they apply employer NI, as well as the administrative and payroll costs involved.
An engager/agency has deemed me inside IR35, but I think I’m outside, what can I do?
HMRC have said they will stand by any result their assessment tool produces. However, as said above, where HMRC believes the tool has been deliberately used incorrectly they will treat this as deliberate non-compliance. However, as far as the locum is concerned, there is little that can be done to overturn the decision.
Do engagers/agencies have to offer employment protection to workers they deem inside IR35?
Being employed for tax purposes and being employed for statutory purposes are separate legal entities. Being deemed employed from HMRC’s point of view does not automatically confer any employment rights. Such a decision would fall within the remit of an employment tribunal.
Should a tribunal rule in the favour of the worker and agree they have statutory employment rights then the engager/agency would have to provide such protection as:
Furthermore, depending on the status of the engager, they may also be obligated under such circumstances to offer employment terms no less favourable than the BMA model salaried contract.
Whether a locum wishes to press for employment rights depends entirely on the engagement. A locum who does regular work each week for an engager may be more inclined to seek employment rights than someone who is seeking casual ad hoc shifts.
Matt Mayer is a salaried GP and executive member of the BMA sessional GPs subcommittee
Helpful summary - thanks.
While it is correct that IR35 only applies to ltd companies and not sole traders, it is inaccurate to say that sole traders will not be affected as of April 2017. They will be affected, the changes will affect any off-payroll Worker, whether they are ltd company or sole trader. Furthermore, if you do not meet the criteria to be outside of IR35, then automatically you will also not meet the criteria of being self employed or sole trader.
What about chambers?
Intermediaries legislation only applies where there is an intermediary (hence the name). For a sole trader there is no intermediary, so IR35 does not apply. See the official guidance from BMA Law (link above) for more info.
With regard to chambers, this issue is complex and depends on the structure of the chambers. The recommendation is for each chambers to seek legal advice specific to their circumstances.
I work directly for regular practices via my own Limited company. I don't have to provide cover etc. We jointly decide schedule (my hours) & how the work needs to be done (e.g. filing letters). My task determines the location e.g. home visit or surgery. I have my own equipment and use my car not just for commuting (e.g home visits). The toolkit says I fall out of IR35. Is that accurate for any similar GPs?
From above advice re sole traders - "No. As there is no intermediary between you and the client, you are excluded from IR35. In this case, the issue is solely with regard to employment status.". Can I ask what "..... In this case, the issue is solely with regard to employment status." means. I don't understand how this relates to the advice.
HMRC have said they will stand by any decision produced by their online tool. The tool is used anonymously, but you can print out the result and file it for your records.
In answer to the question about employment status, this is pointing out that IR35 does not apply to sole traders (as there is no intermediary), however the question of whether the worker is employed still remains but purely with regard to whether they are entitled to employment rights.
Being employed for tax purposes and being employed for statutory purposes are decided by separate legal regimes.
Does this apply in Scotland with the newly devolved tax powers?
Hi there,I noted the comment below . This is exactly me aswell. But I am surprised as I believed from reading this article and BMA guide where ever limited company , an intermediary is involved it comes within IR35. Can you comment on this please ?
"I work directly for regular practices via my own Limited company. I don't have to provide cover etc. We jointly decide schedule (my hours) & how the work needs to be done (e.g. filing letters). My task determines the location e.g. home visit or surgery. I have my own equipment and use my car not just for commuting (e.g home visits). The toolkit says I fall out of IR35.
So lets see the situation as it is on the front line. ALL trusts have now stated that they deem ALL Locum doctors to fall under IR35. PERIOD.
If I am employed as an A&E Middle Grade doctor & if I do Locum Shifts OUTSIDE of the trust where there will be freedom for me to perform my job of seeing patients @ an A&E & discharging them Without any Supervisory input, Substitution is a grey area as Locums just either accept or decline the shift, and in the case of a locum not being able to they just inform the hospital accordingly . Mutuality of Obligation again does not come into effect, there is no regularity of work & pay.
using HMRC's tool and inputting all these factors it states clearly that this engagement would be outisde of IR35.
Informing the Hospital HR managers that HMRC Tool declares the engagement as outside of IR 35 does nothing !
But as it stands at present all the NHS trusts are stating that EVERYONE will be inside of IR35.
I think there are numerous GP's who are in the same boat .
Who is correct ? is there any further clarity regards this on the way ?
Will it take a legal challenge to clarify this situation .. or just accept it & Move on ?
Any further clarity or advice ?
Thanks for your comments and questions.
To clarify - This legislation applies across the whole UK.
In answer to the comment above about blanket policies being used by trusts, this is answered in the FAQs above under "Can an engager/agency deem all workers inside IR35, just to be safe?" your options as a locum working through a Ltd company are given under "What are my options if an engager/agency deems me inside IR35?"
Any trust using a blanket policy will need to bear in mind they will see a 13.8% increase in costs from having to pay employer's National Insurance. They will also have to pay the employer's contribution to the NHS pension scheme.
If anyone still requires further clarification over and above this, I would suggest seeking professional legal advice.
Hi Matt - is this official advice from the BMA?
As a partner in a GMS practice I sometimes do locums / extra sessions in my own practice but charge theough my company should this be now considered inside IR35
Secondly my partnership holds an APMS contract as well and I do additional work under this contract and get paid via my company is this ousiden IR35 as its an APMS contract
For clarification, the nature of the contract or provider does not determine whether the engagement falls inside or outside of IR35. The criteria for deciding whether an engagement is inside or outside has not changed, the change is in who is responsible for determining the status, and who is liable for any error. An APMS provider is not a public authority, and therefore the responsibility for determining whether an engagement is inside or outside IR35 remains with the worker's company. The test as to whether an engagement falls inside or outside is done via the HMRC tool.
Regarding questions about individual work circumstances such as locums at ones own practice - I would suggest seeking the professional advice of an accountant.
Regarding whether this is official BMA advice - This is a blog done by myself in order to try and answer some of the frequently asked questions regarding the changes in legislation. The full official BMA guidance can be found by following the link in the blog above - That official guidance has been prepared by BMA Law, who likewise recommend seeking legal advice in individual cases.
Thanks Matt - never as simple as we hope