The subject of whether somebody is employed or self-employed for tax purposes is currently a hot topic with HMRC. It is a complex subject and relies on tax case law rather than tax legislation.
HMRC’s view is that it is the responsibility of a practice owner to decide whether workers are employed or self-employed for tax and National Insurance (NI) purposes. As HMRC guidance is changing from 6 April 2023 it is likely that reviews of the status of associates (and at the same time anybody else who is engaged on a self-employed basis) will follow shortly after.
What do practice owners need to know?
"If HMRC undertake a review, practice owners will be expected to be fully up to speed with the rules."
The concern is that some associates should potentially be treated as employees and subject to PAYE (tax and NI), otherwise there is no purpose to changing the guidance.
If HMRC undertake a review, practice owners will be expected to be fully up to speed with the rules and to demonstrate to HMRC’s satisfaction that associates have been treated correctly (including hygienists and therapists) as self-employed for tax purposes. The overall picture will be considered for each person and status tests will be applied.
In broad terms, if HMRC successfully reclassify a self-employed person as employed for tax purposes, then any tax and National Insurance that is due will be payable by the practice owner, although a tax set-off may be available.
An important point to note, in relation to associates, is following the change to HMRC’s guidance on tax treatment there is the pre-6 April 2023 position and the post 5 April 2023 position:
Changes to tax treatment guidance
Pre-6 April 2023 position
- HMRC will accept that the associate was self-employed for tax purposes if engaged on a BDA or Dental Practitioners Association contract and the terms have been followed
- HMRC could go back six years when calculating the liability if the Associate was:
- Not engaged on a BDA or Dental Practitioners Association contract; or
- Engaged on a BDA or Dental Practitioners Association contract and the terms were not followed.
Post 5 April 2023
- HMRC will no longer simply accept that an Associate is self-employed if engaged on a BDA or Dental Practitioners Association contract and the terms have been followed. The practice owner will need to demonstrate self-employment for both new and existing associates using the normal status tests, including HMRC’s Check Employment Status for Tax (CEST) toolalthough other tools are available and may be used.
A word of warning for anybody who is using HMRC’s CEST tool, it is subject to interpretation and should be completed using HMRC’s supplemental notes.
The above comments relate to the engagement of sole traders. If a worker is engaged via a Personal Services Company (PSC), often referred to as IR35, the rules are potentially more complex. Depending on the size of the practice, if there is a tax and NI liability it may be the responsibility of the PSC rather than the practice.
Preparing for the changes
"It is vital that practice owners are prepared for the changes ahead of time."
It is vital that practice owners are prepared for the changes ahead of time which means being aware of the issue and understanding the implications for associates engaged on contracts at your practice.
You should begin to identify any workers that are not paid via the payroll and subjected to PAYE and undertake the appropriate due diligence as soon as possible. You can use HMRC’s CEST tool or similar, but it is important to demonstrate that your associates have been correctly treated as self-employed.
Paul TuckerSenior Employment Tax Specialist, UNW LLP