UK healthcare firms must remain alive to the need to manage IR35 risks

IR35 targets the use of ‘personal service companies’ (PSCs) to avoid employment taxes. Broadly, where a business engages an individual ‘off-payroll’ and through an intermediary such as a PSC, the individual can achieve employment tax savings, whilst the business is not required to pay employer national insurance contributions (NICs) – currently at 13.8%.

When a business engages with an individual through a PSC, IR35 requires that the individual should be taxed as an employee, if they would have been deemed to be an employee for tax purposes had they engaged directly with the business. The engaging business is required to issue a ‘status determination statement’ (SDS) to the individual worker and any other intermediary the client contracts with, confirming its determination and providing reasons.

The IR35 rules apply across the public and private sector, and therefore can be widely applicable to the healthcare sector. However, there is an exemption for “small” private sector businesses. Where a small business engages a PSC worker, the PSC is responsible for determining whether the rules apply and paying any taxes due under IR35.

Managing IR35 risks across the healthcare sector

The healthcare sector is not unique in having to address IR35 risks. HM Revenue and Customs (HMRC) expects all businesses, across all sectors, engaging off-payroll workers to consider IR35 requirements.

IR35 risk management strategies are not sector driven – rather, they will vary according to the nature of the engaging business. A small private sector healthcare business with few off-payroll workers will approach IR35 risks differently to a large healthcare provider using several recruitment agencies and engaging with hundreds of temporary workers at any one time.

All businesses that do not benefit from the small company exemption should review their contractor populations and introduce IR35 compliance programmes. Prior to engagement, PSC workers should be identified, status determinations completed and SDSs issued to the workers and relevant third parties in the contractual chain. IR35 compliance procedures should be regularly reviewed to ensure that they remain fit for purpose and that individuals responsible for compliance receive adequate training.

To manage IR35 tax risks, healthcare providers heavily reliant on flexible labour to meet resourcing needs may seek to engage all PSC workers through third party recruitment agencies whereby the agencies, as the fee payers, would be responsible for paying any taxes on fees paid to PSC workers determined as falling ‘inside IR35’.

Need to take ‘reasonable care’

Using a recruitment agency doesn’t eliminate IR35 risks. The engaging healthcare provider remains responsible for making IR35 determinations and issuing SDSs for all PSC workers engaged indirectly by an agency.

Responsibility for paying IR35 related taxes, and any interest and penalties that may become due, can also transfer back up the supply chain to the engaging healthcare provider if it hasn’t taken reasonable care when making IR35 determinations and issuing SDSs. Ensuring that a healthcare provider has taken reasonable care is therefore pivotal to an effective IR35 risk management strategy, particularly when a healthcare provider engages significant numbers of PSC workers through third party agencies.

Reasonable care is not defined. HMRC guidance provides a non-exhaustive list of ‘behaviours’ indicating whether reasonable care has, or has not, been taken when making status determinations. Primarily, HMRC expects a business to undertake a ‘complete and thorough’ assessment to determine whether a PSC worker should have been an employee for tax purposes if engaged directly.

When is a worker ‘inside IR35’?

There is no codified legal test to determine employment status for tax purposes. The test has been developed through court decisions and is based on several factors – including whether there is a mutuality of obligation between the parties, the level of control that a business has over the worker, whether the worker can provide a substitute, how integrated the worker is in the client’s business and whether the worker is in business on their own account. HMRC has published detailed guidance and has also developed the ‘Check Employment Status for Tax’ (CEST) tool to determine employment status for tax purposes of specific workers.

HMRC has said that it will stand by a CEST determination, as long as the information inputted remains true and accurate. CEST may not always provide a determination and is estimated to fail in 15% of cases. Therefore, when making status determinations, it is often recommended that a business uses a combination of CEST and its own judgment.

Complex supply chain risks

Managing IR35 risks across the healthcare sector can be difficult in complex supply chains. It may be difficult to identify the client where a PSC worker is being engaged by a business as part of a wider supply of services to a healthcare provider, since it may be unclear whether the client is the company engaging the PSC worker or the healthcare provider that is the ultimate recipient of the services being supplied. If the services are ‘fully contracted-out’ of IR35, the client is the business engaging the PSC worker as part of the wider supply of services - often referred to as the service provider.

HMRC distinguishes between businesses that enter into a contract for a supply of labour and are clearly clients under IR35 and those which contract with a service provider for the supply of a fully contracted-out service and are not clients. Determining whether a supply of services is fully contracted-out can be complex and is a question of fact, based on actual working practices. HMRC has published limited guidance on how to determine whether a service is fully contracted-out; however, confirming the identity of the client remains difficult in complex supply chains.

The client is legally responsible for making status determinations and issuing SDSs. If the client has been wrongly identified then, strictly speaking, the 'true' client will have inadvertently failed to comply with its legal obligations under IR35. Therefore, if HMRC disagrees with a decision regarding whether a service is fully contracted-out and the identity of the client, there is a risk that the business that is the true client could face unexpected tax liabilities and penalties for non-compliance.

Businesses across the healthcare sector should remain alive to the need to manage IR35 risks when engaging with flexible labour through PSCs and ensure that they have robust onboarding and compliance processes so that they are able to identify PSC workers, undertake status determinations and issue SDSs prior to engagement.