The 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.
The IR35 or intermediaries legislation is designed to ensure that individuals who ought to pay income tax and NIC as employees cannot use a corporate structure to reduce their liabilities.
In this case, the tribunal judge had to determine whether the features of each contract were akin to employment or self-employment status, and therefore how much tax the appellant was required to pay.
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.
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 off-payroll rules in the public sector. It will also be pertinent to the private sector where the IR35 rules will apply from April 2021.
'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.
'Those in the medical profession operating as contractors can find it difficult to fend off IR35 because of the controlled environment they operate in.
'What was impressive in this case was that the appellant represented himself. This was no mean feat and he had clearly prepared well reading up on the various case law. Whilst he didn’t achieve a complete win he has to be commended for take the case forward.
'HMRC will likely feel relieved that this partial victory has ended a run of consecutive high profile IR35 defeats.
'Above all, the case highlights the importance of written contractual terms, something which has been introduced on 6 April 2020 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.
'Whilst this case relates to a locum engaged in the NHS it has wider relevance given that IR35 rules are set to be extended to the private sector from April 2021.'