The 6 April 2023 marked the starting point of the implementation of new guidance for determining the employment status for tax in relation to associate dentists.
Previously, associate dentists and practice owners relied on case law and, additionally, according to dentist-specific wording in HM Revenue and Custom’s Employment Status Manual, could be deemed as self-employed as long as they had a contract that was in line with that provided by the BDA. This was with the provision that key conditions of the contract were followed.
What is the change in guidance?
The official HMRC stance is the withdrawal of dental specific guidance from 6 April 2023, and that status should instead be considered by dentists in line with the Check Employment Status for Tax (CEST) tool.
Practice owners need to look at any performers (in this case, the associates) that are not paid through the payroll and their position from a tax perspective, the same as any other business.
What this means is that HMRC, and of course the practice owner as an engager of an individual, will look at how this person has been engaged. Are the engager and performer satisfied that they should be treated as self-employed for tax purposes? For associates, whether you’re being engaged on a self-employed basis or an employed basis, you as an individual need to understand what the contractual terms of either arrangement are. HMRC will look at what happens in practice, and they will expect that to be confirmed by the contract.
If HMRC undertakes a review, they may well discuss the engagement with both the engager and the performer. They will pose a series of questions and expect both parties to understand how the arrangement works. HMRC will expect both parties to clearly understand the arrangements in the contract and the procedures that follow within the practice.
There is a key indicator of self-employment that is worth noting as part of the CEST tool, which is specific questioning surrounding substitution and enforcement of the locum clause within the Associate contract. Understanding this clause, and putting the right measures in place could strengthen your self-employed status.
What is the locum clause?
Should the associate within a practice be unable to perform their duties as per their contract, this clause obliges the associate to provide a locum in their absence.
Something that has become somewhat of a standard practice within dental practices is the expectation that the remainder of the dental team will be able to absorb the absent performer’s workload rather than enforcing the locum clause.
What are the risks for associates and principals?
As a principal, not enforcing the locum clause will flag up on the CEST test and will be questioned when the Revenue come to visit. Principals and associates will be interviewed separately and if their stories don’t tally then it could be bad news for the status of the associate.
Should the associates be considered employed, you will be required as an employer to pay employer National Insurance contributions and provide a standard basket of employee benefits – for many practices the impact on profitability would be considerable.
Based on an associate earning £80,000 as an example, then employer National Insurance contributions alone are £9,784.20 per associate, and HMRC could potentially backdate six years. If you have four associates, then the liability on your practice ranges from £39,136.80 to £234,820.
For associates, in many cases being self-employed is the favourable position for maximising their income when taking taxes into account. The alternative ‘risk’ is to enforce the clause and risk losing your associate as the hit on their income could be substantial.
How to mitigate the substitution risk
The optimal way forward for both parties is for the associate to obtain locum cover, protecting themselves for when they are potentially unable to work without having the big hit on income by paying for the locum out of their own pocket.
Principals could support this change in approach to associate absence by paying 10 - 15p per unit of dental activity (UDA) or equivalent in other areas of the UK, more. If an associate is doing 6,000 UDAs then that’s an extra £600 to £900 per annum, but that should cover the cost of the locum cover in most circumstances.
The question you need to ask yourself as a principal is, which ‘risk’ would you rather have - approximately a £900 premium for locum cover or a figure somewhere between £39,136.80 and £234,820, payable to HMRC?
For associates, it’s weighing up the substantial tax benefits of being self-employed, alongside more freedom over working hours against the benefits of being employed. If your preference is the former, locum cover could be the solution to help ease any financial risk should you be unable to practise.
For further guidance on protecting self-employed status, get in touch with a Specialist Financial Adviser from Wesleyan Financial Services today.
Tax treatment depends on individual circumstances and maybe subject to change in future.