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Explained: HMRC withdraws locum-specific tax guidance

With the government to withdraw employment status guidance for locum pharmacists later this month, Atif Butt explains what could change and why it matters

HMRC recently announced the removal of sector-specific employment status guidance for locum pharmacists. The previous guidance outlined that locum pharmacists engaged on a sessional or daily basis, performing only the statutory requirements of their role, were likely to be considered self-employed for tax purposes. However, those involved in managing staff, cashing up and ordering stock were more likely to be considered employees.

This sector-specific guidance helped determine employment status within the pharmacy industry, with HMRC also stating that locums engaged through standard agreements provided by the National Pharmacy Association (NPA) or the Pharmacists' Defence Association (PDA) were likely to be self-employed.

Read more: Revealed: The average locum pharmacist pay rate in 2022

From next week (June 30), HMRC is replacing the sector-specific guidance for locum pharmacists with general guidance on employment status. The employment status of individual locums will need to be assessed using HMRC's online check employment status for tax (CEST) tool. The responsibility for this assessment will lie with the end user/payer of the locum pharmacist.

This change aims to align the guidance within the pharmacy sector with HMRC's general principles for determining employment status. The goal is to avoid potential conflicts and confusion arising when sector-specific guidance deviates from broader employment status guidelines.

 

CEST la vie

 

CEST is a digital tool created by HMRC to assist public authorities in determining whether a contractor falls within or outside the scope of IR35. IR35 refers to the legislation that outlines rules for off-payroll working. The tool is designed as a quiz-like format where users answer a series of questions to decide if someone qualifies as self-employed or if they should be treated as an employee.

Read more: Deja-vu: Government U-turns on plans to scrap IR35 tax reforms

In 2017, HMRC announced significant changes to the IR35 regulations, affecting the use of self-employed and freelance workers in the public sector. These changes were later extended to the private sector in April 2021. Previously, contractors were responsible for determining their employment status and tax arrangements.

However, under the new regulations, it became the client's responsibility to determine employment status and deduct the appropriate taxes – unless they qualify as a small company. HMRC developed the CEST tool to aid public sector authorities in making these determinations quickly and cost-effectively. An updated version of the tool was released in November 2019.

IR35 applies to medium and large-sized companies, making them responsible for checking a contractor's employment status under the off-payroll working rules. However, small companies are largely exempt from these rules, shifting responsibility for determining employment status and ensuring correct tax payments to workers. HMRC defines a small company as one that meets two or more of the following criteria:

  • Annual turnover not exceeding £10.2 million

  • Balance sheet total not exceeding £5.1m

  • Average of no more than 50 employees for the company's financial year

When these requirements are met for two consecutive financial years, the small business exemption applies, and the contractor retains responsibility for applying the IR35 rules.

Read more: Locum rates: Could you earn more by operating as a limited company?

Under the Employment Rights Act 1996, there are three main types of employment status:

  • Employees: Employees work for an employer or business owner under the terms of an employment contract. They can expect a consistent flow of work and have an obligation to carry out their duties unless they are on leave, such as holiday or maternity leave. Employers are responsible for paying and taxing employees, as well as providing additional rights like maternity and paternity pay, a minimum notice period, and statutory sick pay. Employees have extra employment rights that do not apply to workers who are not employees.

  • Workers: Workers are individuals who work personally under any type of work contract and are not self-employed. Examples include agency workers and freelancers. Workers often have more casual jobs and less obligation to make themselves available for work. They have basic employment rights such as written terms of their role and responsibilities, health and safety protection, national minimum wage, and paid holiday.

  • Self-employed: Self-employed workers have the freedom to decide when, where, for whom, and how they work. They can arrange their own sickness and holiday plans and are responsible for paying their taxes and national insurance. Self-employed workers have fewer employment rights compared to employees and workers but are protected against discrimination and enjoy health and safety protection on their client's premises.

For pharmacies, engaging locums as self-employed rather than employees is generally advantageous. This arrangement exempts pharmacies from paying employers' national insurance on locums' earnings and reduces their responsibilities towards self-employed workers compared to employees. For locums, being self-employed can offer tax advantages, such as the ability to work through a personal service company and pay themselves dividends.

 

Using CEST

 

The CEST tool can be easily accessed online, allowing users to check the employment status of individual locums by answering a series of questions regarding the engagement. Each contractor is evaluated on a case-by-case basis. If a pharmacy wishes to contract a locum’s services, it is advisable to have evidence of having checked the locum's employment status by using the CEST tool and saving the results.

The tool asks questions about the worker's duties, the possibility of using substitutes and helpers, work arrangements and financial risk, as well as integration into the organisation.

These questions help HMRC assess whether an assignment falls under IR35, making the locum an employee, or if it falls outside IR35, allowing them to be considered self-employed. To be considered outside IR35, HMRC looks at the following factors:

  • Can the locum demonstrate that they are not subject to the supervision, direction, and control of the hirer?

  • Are they paid based on achieving timescales, milestones, and targets?

  • Are they responsible for any losses incurred as a result of their working practices?

  • Do they provide their own equipment?

  • Are they able to offer a suitable substitute if they are unable to undertake the work?

  • Do they have flexibility regarding when and how services are provided?

  • Are they free to provide their services to any client without exclusivity or restrictions?

The more questions that can be answered affirmatively, the greater the chance of meeting HMRC's criteria for self-employment status.

Read more: Kwarteng scraps IR35 tax reforms, removing ‘ambiguity’ for pharmacists

The removal of pharmacy sector-specific guidance by HMRC does not imply a change in its view of locum pharmacists' employment status. Employment status is still determined based on the terms of any written contract, the facts of an individual's working arrangements, and relevant case law.

Therefore, it’s advisable for all pharmacies to ensure they have an appropriate contract in place with any locums, together with a completed CEST assessment that can demonstrate their self-employment status.

Atif Butt (FCCA) is senior accountant at Hutchings Accountants Ltd – specialist pharmacy accounting

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