Nigel Jones speaks to Alan Suggett and Lee Muter about their views on HMRC’s current tax focus on the employment status of dentists and how any changes to this will affect the sector…
In April 2018 HMRC wrote to associates about a review they were holding into their self-employed status. Since then, there has been much speculation about what this could mean for the future of associates and the wider profession. In late 2018 the BDA said it had become aware that HMRC was writing to more associates and inviting them for interviews in relation to this review.
To seek some further clarity on this ongoing issue I discussed the implications of the review with Alan Suggett, from NASDAL (National Association of Specialist Dental Accountants and Lawyers) and UNW LLP chartered accountants, and Lee Muter, also from UNW…
Nigel Jones (NJ): What is happening in the tax world for associate dentists?
Lee Muter (LM): In recent months, HMRC has been contacting several associate dentists, mainly based in the north west of England, informing them that they are carrying out a review of dental associate employment status. Our current knowledge is that this is an initial fact-finding mission to understand the current working patterns of associate dentists.
HMRC’s long held view has generally been that as long as an associate continued to pay their share of laboratory fees (when the premises was run by another dentist), they would remain self-employed if they kept to the terms of their associate agreements, which are approved by the BDA and the Dental Practitioners’ Association (DPA). Recent tribunal cases highlight issues surrounding employment status; it still seems that HMRC remain content that as long as dentists follow the rules and use a BDA/DPA approved contract, associates continue to be regarded as self-employed However, categorising dental associates as self-employed for tax purposes is not always straightforward as we are aware anecdotally that many associates either do not have the required contract in place, or their working arrangements do not ‘fit’ the terms of that contract. Depending on the actual nature of the contract or working practices, it is possible that we may see the employment status of associate dentists being challenged by HMRC.
NJ: What do you mean by self-employed for tax?
LM: Whether or not a worker is employed or self-employed is not a matter of choice and instead depends upon the terms and conditions of the engagement of the worker. There are various tests applicable in determining employment status and they will all need to be considered each time a new contract is entered into, but there are still many grey areas as these tests are subjective. In the dental sector, the fact that dentists can locum is key to ensuring self-employed status, although the contract must reflect the genuine nature of the engagement.
NJ: How does the definition of employment status for tax differ from employment law?
“Confusingly, it would be possible for an individual, the associate dentists in this case, to be self-employed for tax purposes, and a ‘worker’ for employment law purposes.”
LM: For tax purposes an individual is either employed or self-employed, however under employment law there is an additional category in between that of an employee and self-employed called a ‘worker’.
Confusingly, it would be possible for an individual, the associate dentists in this case, to be self-employed for tax purposes, and a ‘worker’ for employment law purposes.
If an individual is defined as a ‘worker’, this will not automatically affect their status as ‘self-employed’ for tax purposes. There have been cases where an individual is a ‘worker’ for employment law circumstances, but self-employed for tax purposes, for example, this has been shown in some recent cases of ‘gig culture’ workers, such as Pimlico Plumbers and Uber where the cases revolved around the individuals being classed as ‘workers’, but were still classed as self-employed for tax purposes.
NJ: What are the implications if associates’ employment status (for tax purposes) is reclassified to be employee?
LM: If all associate dentists were classed as employees, dental practices would then be obliged to operate payroll for any earnings paid to them. The dental practices would be responsible for deducting tax and employees’ National Insurance Contributions (NIC) on the amounts paid through the payroll system and the dental practice would need to pay Class 1 Secondary NIC (employer only contribution) of 13.8% on the gross amounts paid to the associates.
“If all associate dentists were classed as employees, dental practices would then be obliged to operate payroll for any earnings paid to them.”
In addition, dental practices would also need to consider offering other statutory benefits to associates, such as a workplace pension.
For the associate dentist, the change would mean that they would no longer be required to submit self-assessment tax returns for their dental income, as all income they receive would be taxed through the payroll.
AS: This is a particularly important commercial point. The question is – who would pay the extra NIC which my colleague Lee outlines above? In fact, the NIC situation is somewhat worse when the additional NIC paid by employees in comparison to self-employed is taken into account.
However, just considering the extra employers’ NIC of 13.8%; based on average associate self-employed earnings of approx. £70,000 pa this would result in an additional NIC payment of approx. £10,000pa.
Who is going to suffer this? In the first instance the practice, but is that where it would end?
Some cynical commentators assume that this cost will be passed on to the associates – an immediate pay reduction of £10k pa. However, I think it will accelerate the associate geographical supply and demand problems which currently exist. Furthermore, it is likely to push some NHS practices currently teetering on the edge of the financial precipice, over it!
Why is this? The vulnerable practices I am referring to will have a stark choice – either attempt to pass the extra NIC on to the associate, and if the associate leaves as a consequence and can’t be replaced, then fall over the financial precipice; or absorb the extra NIC within the practice profits, and fall over the precipice as profits are insufficient to service practice acquisition loan repayments and reasonable principal drawings!
“It is clear to me that it is in no one’s interests for Associates to become employed. It is likely to lead to poorer associates and the failure of a number of practices”
It is clear to me that it is in no one’s interests for Associates to become employed. It is likely to lead to poorer associates and the failure of a number of practices – not in HMRCs interests; and a reduction in access to NHS dentistry across the UK – not in the Department of Health’s or the population at large.
NJ: Where do you think the employment status arguments will go in the future?
LM: As the main issue with employers paying self-employed staff is in relation to the perception that there is ‘lost’ NIC (dental practices will not pay employers NIC on any payments made to self-employed dental associates) then it now looks more probable than ever before that HMRC will seek to reclassify all associates as being employees. My own view is that this is too simplistic, and each case should be taken on its own merits and where associates do demonstrate the characteristics of self-employment (whatever form that may take in the future) then they should be able to continue being treated as self-employed.
AS: I am very concerned about the potential problems which would arise if the tax status of associates is changed. Whilst in theory NHS practices would have their income increased to compensate (because the annual review of NHS contract income should take it into account), I have little confidence that this would happen in practice. Evidence for this is the decline in NHS practice profits over the last few years. Even if I’m wrong there would be a time lag in the increase in income, and there are many NHS practices in the regions who are already in a difficult financial position and unable to withstand even a temporary reduction in profits.