HMRC On The Hunt: Are Associates Actually Employees?
Key Contact: Claire Knowles
Author: Adam McGlynn
Employment status can be taxing, in more ways than one, but it is more important than ever to understand how it applies to associate dentists. Why? As of 6 April 2023, HMRC has withdrawn occupation-specific guidance for dentists from the Employment Status Manual (ESM4030), meaning HMRC will be following their general approach to assessing tax status (ESM0500). This signifies two things to me: (1) HMRC plan to set their sights on the dental industry; and (2) practice owners and associates hoping to rely on previous guidance, or a BDA or DPA style contract, will need to review their contracts and day-to-day practices to safeguard against an unexpected letter from the taxman.
Employment vs Self-Employed
An associate can either be employed or self-employed for tax purposes, and can be either an employee, a worker, or self-employed for employment law purposes. The preferable engagement will depend on personal priorities. Employees benefit from greater financial security, enjoying regular pay and statutory protections like sick pay, maternity pay, and protections against certain treatment and dismissal decisions. On the other end of the spectrum, self-employed associates will face greater financial risk but can reap the rewards when exceeding expectations, together with a more favourable tax position and more flexible B2B arrangements. The difference between employees and workers has narrowed in recent years, likely to protect the ever-growing gig-economy workforce, and so workers will benefit from most employment rights save for a few, notably their lack of termination protections. Workers can fall into either employee or self-employed categories for tax status, but their worker status will be a red flag inviting scrutiny.
Accurate status categorisation is essential for both practice owners and associates to avoid potential tax and employment risks, including backdated NIC and income tax liabilities, HMRC investigations and penalties, and backdated (or loss of) employment rights.
How is Status Assessed?
In a typically legal and convoluted fashion, it depends on who you ask. HMRC usually assess employment status focusing on the presence of ‘supervision, direction, and control’. The tax and employment tribunals take a broader approach, focusing holistically on personal service, control, mutuality of obligations, and other factors such as financial risk and integration. While all three of these institutes take slightly different priorities, one important unifying theme is that they will look beyond the contract and assess the reality of the relationship in practice, so you really will need to practice what you preach.
Case Law Sets the Tone
The risk of miscategorisation is quite well demonstrated in the two recent cases of Gilder and Sejpal.
Gilder v TDSML.
Gilder involved a dental hygienist who had been working with a practice for a decade and a half on a self-employed basis. She then brought a claim that relied on employment status and successfully contending that she was a deemed employee. The fact that she was required to work personally and could not provide a substitute, that she worked a fixed number of days per week, that she was expected to see patients referred to her, and that her time off was controlled by the Respondent all contributed to her success.
Sejpal v Rodericks Dental.
In Sejpal too, the Claimant needed to establish that they were a worker in order to pursue a claim for discrimination, sick pay, and holiday pay. To establish worker status, there must be (1) a contract with sufficient mutuality of obligations, and (2) personal service. This first requirement may seem to fail where the contract uses wording such as ‘may introduce patients’ and ‘may but is not obliged to accept patients’. However, where there is no evidence of patients being withheld or rejected in practice, such wording will not defeat employee or worker status. The second requirement too may fail where there are sufficient substitution/ locum rights, however, any limits on the ability of the associate to provide a locum freely may negate this, indicating employee or worker status. This case demonstrates that both contract construction and conduct in practice are important and that seemingly minor variations can mean the difference between tax treatment and employment right entitlements.
My first recommendation is to review your contracts. Case law and clause drafting practices relating to employment status have progressed rapidly over the last couple of years so it even contracts drafted well a couple of years ago could need updating. Second, use HMRC’s Check Employment Status for Tax (CEST) tool and be as honest as possible when doing so. It has been criticised for its simplicity but it is a good start to understanding what your risks may be. My third and final recommendation is to seek legal advice if in any doubt about your employment status or the status of the associates in your practice. It usually does not take long for a legal professional to make an assessment and provide tailored recommendations and, even if there are no issues, the peace of mind can be invaluable.
For advice on any of the topics discussed, contact the Employment team at Acuity Law.