*UPDATE: From April 2021 the rules for engaging individuals through personal service companies are changing. The responsibility for determining whether the off-payroll working rules (sometimes known as IR35) apply will move to the organisation receiving an individual’s services.* 

The IR35 legislation states that where an individual provides his or her services to a client via an intermediary such as a personal service company (PSC), if that relationship would (but for the presence of the PSC) be one of employment, the PSC is liable for tax and social security contributions on earnings.

However, since April 2017, contractors and freelancers can no longer determine for themselves whether they are self-employed when they work for a public authority or charity (on the freedom of information act list). From April 2021, this rule is set to apply to the private sector too.

These off-payroll working rules will be a major change for the larger charities, who have not already been caught. It will mean that those charities will have new responsibilities to pay PAYE and national insurance (and apprenticeship levy where appropriate) where an intermediary is engaged, and the relation is that of a deemed employee.

The good news is that the clear majority of charities will be small, and so may well be exempt.

The problem with these new rules is that they encouraged some organisations who hire contractors, to apply blanket decisions on whether certain contracts fall within IR35.

As HMRC has encountered there is no single or absolute test of when a relationship is one of employment or deemed employment rather than genuine self-employment. Each case turns very much on its own facts. In the recent cases of Ms Kelly and Ms Adams, these individuals and their limited companies were assessed for tax by HMRC on the basis that they fell within IR35. They each challenged this finding and the Tax Tribunal upheld their contention that they were genuinely self-employed.

This latest IR35 ruling by the First-tier Tax Tribunal into the contracts entered into by an NHS locum with two hospitals found that while one contract fell inside IR35 rules the other fell outside. HMRC will likely feel relieved that this partial victory has ended a run of consecutive high profile IR35 defeats.

The appellant in this case was a urologist who operated through his own personal service company (PSC), providing services to the Royal Berkshire Hospital (RBH) and Medway Maritime Hospital (MMH) respectively. At both hospitals the work consisted of conducting outpatient clinics, procedures and minor operations. At RBH, he also undertook a small amount of on-call duty.

Judge Charles Hellier concluded that, given the appellant’s expertise, in many respects, the circumstances of the MMH engagement would be the same as those of the RBH engagement. There was almost no direct oversight of his work. He did not report to anyone on a daily basis. There was no indication that he was subject to control over how to perform any part of his work and whilst there was some review of his work there was no direct/close supervision of his work.

However, there were three important respects in which the work for MMH differed to the work for RBH. These were what resulted in the split decision – RBH in and MMH out.

The notional contract with MMH contained:

• a valid substitution clause, any substitute proposed had to be suitable on the basis of the hospital’s usual criteria;
• a one day’s notice period. Whereas at least a week’s notice that had to be given under the RBH contract. The Judge commented that one day’s notice is almost illusory and does not point to employment; and
• no obligation on MMH to try to provide either 37½ hours or 10 half day sessions in a week. There would not have been even a qualified obligation to provide work.

This is an important case as it demonstrates clearly how differences in key areas produce a different tax status result. It also highlights the difficulties in making status determinations.

It is understood HMRC are currently deciding if they wish to appeal the outcome in relation to MMH.

Although the tax and NIC at stake was only around £30,000 the case has wider relevance to those operating the current off-payroll rules. It will also be pertinent to the charities where the IR35 rules will apply from April 2021.

HMRC has indicated on several occasions that it believes the assessment of status is straightforward. The number of cases before the tribunals in recent years dealing with correct employment status such as Uber, Deliveroo, Pimlico plumbers and the HMRC’s defeats in the Tax Tribunals indicate this is very clearly not the case.

It highlights the importance of:

• putting written contractual terms in place, something which is being introduced in April 2021 for all workers and employees, as employers will be required to give them written statement of terms to workers on the first day of work;
• gathering all the facts about an engagement;
• considering if the HMRC CEST tool is satisfactory to use to assist in making status decisions;
• having a clear process for undertaking individual status determinations and not making blanket decisions.

Susan Ball is Employer Solutions Partner at RSM UK

The Charity Tax Group responded to the recent consultation on the implementation of the extension of off-payroll working rules to the private sector (including charities) from April 2020 – you can read the response here.