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Getting it right with IR35 tax rules

Community pharmacy owners engaging locum pharmacists need to ensure their contractual agreements and working practices comply with the reformed IR35 tax rules, known as off-payroll legislation. So says Dave Chaplin, chief executive of compliance firm IR35 Shield

IR35 refers to tax legislation initially introduced by the UK Government in 2000 to combat tax avoidance by contractors and firms, where workers are providing services to firms via an intermediary company rather than being an ‘on-payroll’ employee. 

The rules aim to ensure that ‘disguised employment’, where an engagement is effectively like one of employment, is taxed as employment income.

In April 2021, the new off-payroll working legislation extended the application of the newly reformed rules to the private sector, having already applied to public sector engagements since 2017. Under off-payroll, the engaging firm must assess a contractor’s IR35 status for each engagement, and deduct income tax and National Insurance contributions at source if the contractor is deemed an employee for tax purposes.

Withdrawal of HMRC guidance in June 2023

HMRC previously published high-level guidance on status matters for pharmacy owners and locum pharmacists in its Employment Status Manual, section 4270. The guidance stated that “where locums were engaged on a sessional or daily basis, and performed only the statutory requirements of a pharmacist’s job, essentially dispensing and supervision of the sale of pharmacy only medicines, and advising on medicines for the treatment of common ailments, the engagement would likely amount to self-employment”.

The guidance was designed for pharmacists working for pharmacies but wasn’t overly helpful and failed to align with the current case law on status matters. It was withdrawn by HMRC in June 2023, leaving pharmacies relying on HMRC’s more general guidance (ESM0500) and its online Check Employment Status for Tax (CEST) tool. However, these resources do not provide adequate protection or detailed guidance to ensure full IR35 compliance for locums.

Fortunately, for some pharmacy owners, the new rules may not apply, and they may be able to rely on the ‘small companies exemption’.

Small companies exemption

The off-payroll rules only apply to medium or large engagers, as defined by the Companies Act 2006. The original IR35 rules remain where the engaging firm is small – in which case, contractors (locums, in this case) are still liable for taxes and assessing their status. Pharmacies will qualify for small companies exemption if they meet two or more of the following criteria according to the Companies Act 2006: 

  • Annual turnover below £10.2m
  • Balance sheet assets below £5.1m
  • Average employee headcount below 50.

Where the exemption applies, the original IR35 rules continue, with the contractor holding the tax liability rather than the hiring company.

While the small companies exemption provides an advantage now, this exemption will inevitably be removed by future government legislation. So it is prudent to aim for best practice immediately rather than rely on this exemption as a longer-term strategy.

“A lack of attention to IR35 compliance could be a disaster for a pharmacy business”

Medium/large pharmacy groups

Where a pharmacy company is medium or large, perhaps because it consists of a group of associated businesses, the small companies exemption will not apply. A lack of attention here to IR35 compliance could be a disaster. 

Owners could find HMRC knocking on the door issuing business-busting tax bills. Also, when selling their business, having spent years building what they believe to be a lucrative enterprise, a rude awakening during the due diligence process may discover considerable tax risk.

IR35 compliance and tax risks will be closely scrutinised during due diligence by any potential buyers. Any issues identified could significantly reduce the valuation of the business or even prompt the buyer to walk away.

Robust processes

To maintain IR35 compliance and minimise tax risks, pharmacies engaging locum pharmacists should aim to implement robust processes, including:

  • Comprehensively assessing the IR35 status of each contractor engagement using the latest case law guidance
  • Ensuring the contractual terms accurately reflect the genuine working relationship
  • Conducting an assessment and creating a Status Determination Statement (SDS) for each engagement
  • Keeping detailed records of all assessments, contracts and working relationships
  • Seeking specialist IR35 advice to assess compliance whenever unsure.

Next steps

Rather than relying on basic HMRC guidance and the CEST tool, which is deeply flawed because it does not align with case law, reputable advisers should be engaged to help draft IR35-compliant contracts, assist with implementing and refining robust assessment processes, and proactively keep the business informed of any changes to IR35 rules and case law precedents that may apply to them. 

Expert support leads to greater peace of mind that the business model is legally compliant, minimises tax risks and protects the company’s value over the long-term.

  • Dave Chaplin is CEO of IR35 compliance firm IR35 Shield and author of IR35 & Off-Payroll Explained
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