HMRC has announced it plans to investigate dental practices across the UK to ensure that all of the staff and consultants are dealt with correctly for tax purposes. It is an employer’s responsibility to determine the status of its workers and the consequences for getting that wrong can be financially significant.
What this means for your practice
The key issue is - are the individuals working in the business employees or self-employed consultants? The tax position in each case will be different for those individuals and the business itself.
For example, HMRC is particularly interested in the tax status of dental associates. HMRC’s focus is on whether income tax under the PAYE (pay-as-you-earn) regulations and NIC (National Insurance Contributions) charges should in fact be applied to those currently seen as self-employed individuals by the practice because, on analysis, they are in fact employees. Such charges can be significant and HMRC may want to recover them for at least the last four years, depending on the facts in each case. In addition, late payment interest charges and penalties may also be charged in addition to the PAYE tax and NIC. How those individuals have been paid could also affect VAT liabilities.
Employed or Self-Employed?
The key issues in any investigation into the status of an individual working for a business will be:
- What are their contractual terms?
- What do those individuals do?
- How are they managed?
- What level of independence do they have in carrying out their work.
- Crucially, the individual’s employment status is not just down to how they are paid.
For example, is the self-employed associate receiving the same benefits, health, legal and pension rights as their employed counterparts? What are their contracted working hours and holiday arrangements? These are just a few of the factors that could affect the status of the associate noting that the relationship can change over time which may affect the individual’s status without either party realising it.
It is essential that all businesses review, regularly, the employment status of those working within their practices and apply the correct tax rules to any payments made to them. A failure to do so can lead to penalties being charged on the additional tax and NIC arising. An HMRC enquiry will typically be thorough and wide ranging and is likely to look generally at the business from a tax perspective whilst paying close attention to the status of those working in the business.
For example a practice, which is found to have five dental associates whose employment status should have been classed as employed, could be looking at a liability in excess of £1m, based on a period of six years.
If the associates earn £100k** each, per year, HMRC would expect around £33,987 NIC and PAYE contributions per employee, per year to be paid over by the business. Multiplied by all five associates this totals £169,935 per year. So for six years this could total in excess of £1million, with interest and penalty charges included.
If the employee has submitted self assessment returns on those earnings then any tax and NIC paid over can be set against the employment tax and NIC due, with their agreement. But only for four of the years. It is therefore, essential you seek advice before responding to HMRC in order to ensure these calculations are accurate and the amount paid to HMRC is correct.
What should you do next?
Review your contracts: given HMRC’s statement of intent to examine dental practices, it may be wise for you to review the status of your workers to ensure that all contracts of service with them are being dealt with correctly for tax purposes.
Each practitioner’s circumstances are unique and HMRC could assess up to six years of tax liability - or 20 in a worst-case scenario. In addition, the calculation of the amount owed becomes highly complex if an individual, who has claimed self-employment, has paid reduced tax after claiming expenses including fuel, equipment, clothing and other items. VAT may also have been charged dependent upon the level of any payments. If the worker has provided their services through a company and is then deemed to be an employee, it could leave a large shortfall and a complex situation to resolve going forward.
Speak to an expert: Smith & Williamson LLP has extensive experience in undertaking such reviews and assisting businesses in having the correct contracts in place, in addition to ensuring that the correct taxation is being applied to the payments to workers within the business. Often, such payments contribute a substantial part of costs incurred by a business and a failure to get them right can prove financially damaging. We also can assist a business in dealing with any disclosures required to correct matters with HMRC. Often approaching HMRC when there is a problem can mitigate any potential penalties to zero.
Have HMRC already contacted you?
Before you respond, make sure you have spoken to an expert first. Your advisor can assist you in dealing with any approach from HMRC to enquire into the businesses affairs and ensure that the correct outcome for tax purposes is achieved, the years under review are minimalised and any liabilities are kept to the legal minimum available.
**Please note this is an estimation, figures will vary from practice to practice.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.