IR35 for sole trader locums

The scenario

Michael, locum optometrist

“I’m a locum optometrist, working as a sole trader, and I was led to believe that IR35 did not apply to me. However, I’m now hearing that I might be affected even though I don’t operate through a limited company. Is this the case? I’d appreciate any advice you can offer.”

The guidance

David Davies of AOP affinity partner, TWD Accountants

In an ideal world, if you’re a self-employed locum, whether you work as a sole trader or have a limited company, you will want to be classed as self-employed for tax purposes, meaning you will pay less tax. However, HMRC has introduced rules that you need to know about.

IR35 rules were altered in 2021. IR35 relates specifically to those who operate as self-employed but through ‘intermediaries,’ which in most cases means they use a limited company. 

However, there has been very little said about how HMRC is now applying the same rules to Britain’s nearly five million self-employed sole traders.

What’s the risk?

HMRC is looking for sole traders who effectively operate within someone else’s business, but do so in much the same way as an employee would – which could, on the face of it, appear to be what a locum optometrist does.

In many sectors there’s a grey area around who is and isn’t self-employed. However, it can be clearer in instances where locums are working within practices on a regular basis, potentially putting them at risk of ‘false self-employment

HMRC has introduced a Check Employment Status for Tax (CEST) tool on its website, which self-employed locums can use to check their employment status. Unless it states that the worker is ‘self-employed for tax purposes,’ then as far as HMRC is concerned, they’re not.

In many sectors there’s a grey area around who is and isn’t self-employed. However, it can be clearer in instances where locums are working within practices on a regular basis, potentially putting them at risk of ‘false self-employment.’ It’s for this reason that HMRC is specifically targeting the optometry sector.

For locums operating as self-employed sole traders, the outcome shown by HMRC’s CEST tool is normally either ‘employed for tax purposes’ or ‘we can’t determine the status of this engagement.’ The latter requires a further conversation with HMRC, who are likely to prove that the locum is actually ‘employed for tax purposes.’

The penalties

The result of being found to be ‘employed for tax purposes’ is HMRC demanding payment of the following:

• The extra Income Tax and National Insurance that should have been paid by the locum, over and above any tax and National Insurance that they have paid already through their Self Assessment tax return or company
• The 13.8% employers National Insurance that should have been paid by the practice on the gross fees paid to the locum.

From the 6 April 2022 HMRC have also said they will be adding the minimum 35% penalty to the amounts due (although it can be up to 100%.) The law also allows them to backdate the tax demand and penalties. Although they have not done so currently, they could start doing so at any time.

This leaves the locum at risk of being sued by the practice if the practice needs to recover their losses

HMRC also has the legal power to transfer the entire tax and penalties owed by the locum onto the practice if they have no prospect of getting their money from the locum within a realistic time frame. This leaves the locum at risk of being sued by the practice if the practice needs to recover their losses.

It would seem very few accountants are fully aware of the issue. At TWD Accountants we’ve seen numerous examples of locums reporting that their accountants have told them that IR35 doesn’t affect them as they aren’t operating through a limited company.

Unless the locum is working within a business deemed as ‘medium or large-sized’ by HMRC’s criteria, irrespective of whether they are working for a limited company or as a sole trader, it is the locum’s legal responsibility to determine their status (ideally using the CEST tool) and then inform the practice in which they work. However, it’s not in the interests of the practice to leave it to locums to organise this without support, because if the locum makes an error the practice will face a tax bill.

Right of substitution

For almost all locums, there is only one way to protect the status as ‘self-employed for tax purposes,’ and that’s if they have the ‘right of substitution’ in their contract and actively use it. However, this must be done in exactly the right way. There are strict rules around its use, and failure to comply will result in HMRC disallowing it and classifying the worker as ‘employed for tax purposes,’ which will result in the tax and penalties becoming due as mentioned above.

Once you fully understand the rules around the right of substitution and both why and how HMRC is applying it, it’s actually easy to use it in the correct way. It’s also beneficial to both the practice and the locum, allowing both to actually increase their profits. Where it is used, bear in mind HMRC will almost certainly check very carefully to make sure every single rule has been adhered to.

For more information on how to understand whether the right of substitution will work for you and how to implement it correctly, contact David Davies of TWD Accountants on 07775 920 927.

TWD Accountants is an affinity partner of the AOP. For more information and advice, visit its website.