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Tax changes for locums – April 2017 changes afoot

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Following an initial “tease” of information in the Government’s Budget Announcement in March this year, HMRC has released information on reforming the tax legislation affecting locum workers engaged with public sector bodies, including the NHS.

What is affected?

The changes affect a piece of legislation nick-named “IR35” which has been in force since 2000. It’s quite a small piece of tax law which affects workers who are engaged off-payroll, but the changes proposed have huge consequences for the take home pay of all locums in the NHS which could make those extra shifts a lot less attractive from a financial perspective if not tackled appropriately.

What does the Government want to change?

The main change relates to who must consider IR35.

Currently, the IR35 “liability” sits squarely with the locum. If the locum gets their IR35 status wrong then it is their limited company or LLP which is liable for additional tax and national insurance contributions on their income (rather than paying the lower rate of corporation tax).

There has been a lot of criticism of the IR35 legislation for making locums liable for employers National Insurance Contributions as this would usually be paid by the employer, or NHS client of the locum. There is also concern that lower paid locums in some sectors are being unreasonably forced into working through their own limited company so their public sector clients can save money by not employing them.

How does the Government want to change it?

On the basis of all of these arguments; to increase the tax yield of off-payroll workers under IR35 and to ensure the public sector is doing all that it can to ensure all works are taxed appropriately, it is planned that the IR35 law will be changing from April 2017 and NHS locums will be the hardest hit.

Where IR35 applies to a locum, the public sector client (be it an NHS Trust, NHS Primary Care facility etc) will be responsible for deducting tax and NICs before making any payment to the locum where the locum worker is working in the same way as an employee (ignoring payment for holidays, sickness etc).

It is important to note that HMRC have not been consulting on whether these changes should take effect, they are going to happen! HMRC are only consulting on how to ensure this happens effectively.

What does this mean for Primary Care practices?

Where the NHS body pays the locum’s company directly, it will be responsible for carrying out an IR35 assessment to ensure that it deducts tax and NICs at source where it is appropriate to do so. Not all locums will fall within the scope of IR35. Indeed lots of GPs and Consultants are unlikely to be affected where they are not controlled in the services they perform. However, it is key to understand the tests which are to be applied to each role to ensure the practice does not fall foul of this change in the law.

What does this mean for locums?

These changes will mean that locums must ensure that they continue to work as genuinely self-employed consultants in order to continue to receive the level of income they are used to receiving. Support from the practice may help with this and now is a good time to start having conversations about how locums will be taxed in 2017.

How Brookson can help

Brookson have vast knowledge in helping off payroll locums, agencies and end user clients to manage and mitigate risk throughout the supply chain with experience specifically in the Public Sector and the current commitments under the HM Treasury Off Payroll Workers Compliance Directive 07/2012.

We expect to receive further information after the Government’s Autumn Statement and Brookson will be on hand to provide practice support to locums, Primary Care facilities and NHS Trusts. If you would like to hear more about the changes, understand the IR35 tests and the possible impact of these changes to your practice, Brookson can assist your business. Please contact us on 0345 058 1499 or visit www.brooksondirect.co.uk.

2 Comments

  1. Grant Holmes

    Hi,

    I am currently working as a locum at an NHS Trust organisation. I gained this work through an agency with the pay/salary paid by the agency into my Limited Companies account. With regards to the new IR35 tax laws what changes would these have on my income.

    For example, prior to the new tax year I was contracted on £24/hour, the agency then said that with the new IR35 tax laws they would have to deduct 12.5% from my hourly rate taking it down to £21/hour. When I received my pay it worked out at a lot less than £21/hour, in fact on top of the 12.5% a further 16% has been deducted. I was unaware of the additional deduction, having agreed to a contract at £21/hour.

    Do you know how or why the additional deductions have been made and whether I have a case to have this reviewed as a reduction in total of in excess of 25% seems very excessive.

    Any advice you can provide would be greatly appreciated

    Kind regards

    • Matthew Fryer

      Hi Grant,

      Thanks for your comment, I assume that you have already been advised by your Agency that your client (NHS) deems that the income paid to your company post 5th April 2017 will be subject to employment taxes as a result of recent changes to IR35 legislation. I have made the following comments to explain the apparent variances raised by yourself:

      • As the agency is effectively your employer for tax purposes the Agency is obliged to pay over Employers National Insurance at 13.8% of the net amount of your invoice (on amounts paid over £157 per week). The 12.5% appears to an effective rate in this respect. This would impact Agency profits if they didn’t pass on this cost to you by way of a rate reduction.
      • The agency are also required to deduct employees NIC and income tax from the payment it makes to you (just like any other employee).
      • The amount of PAYE deducted is based on your tax code – the basic personal allowance for 2017/18 is £11,500 which equates to a standard tax code for 2017/18 of 1150L. This allowances is divided into 52 or 12 pay periods so you have a weekly or monthly allowance before you pay tax – but if you have other income, then your tax code may be different.
      • Employees National Insurance is charged at 12% on amounts over £157 per week up to £866 per week, then amounts above this level falls to 2%.
      • The basic rate of tax is 20% and you mentioned that there was a further 16% deduction from your income – this appears low based on Income Tax/NI rates, but in general, PAYE is cumulative (unless you have a week 1/month 1 tax code) so you may have prior weekly tax allowances that were offset against your income.

      As you will appreciate, it is difficult to offer a definitive explanation without reviewing the precise circumstance. I suggest that you obtain detailed remittances from your Agency which should detail the deductions (like a pay slip) and discuss with them if you consider that they are incorrect, or involve your accountant if you have one.

      Best regards

      Matt

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