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Tax Adviser by Shiv Mahalingham BSc(Econ) ACA CTA

Shiv Mahalingham BSc(Econ) ACA CTA outlines the tax treament of income and expenses for medical professionals.This article was published in Tax Adviser February 2004.

Key Points

1. Medical professionals are likely to have a variety of income engagements and it may not be immediately obvious under which Schedule such income should be assessed.

2. The Schedule will be important in scertaining the overall tax liability of the medical professional.

3. Control is important but not the only issue and there are various other determinants to be aware of.

4. Even seemingly casual engagements could constitute employment income.

5. An individual should take responsibility for assessing which Schedule is applicable from the beginning of an engagement.

Introduction

Individuals in the medical profession may generate income from a variety of different engagements undertaken on behalf of the National Health Service (NHS), hospitals, universities, and practices (collectively referred to in this article as “medical institutions”). Job specific expenses will be incurred in the performance of these engagements, which may or may not qualify for an income tax deduction and subsequently the
end of year personal tax return for these individuals can have a complicated profile. This
article attempts to draw together the basic income tax risks and opportunities to be aware of in the management of the income tax affairs of the medical professional and the preparation of the end of year return.

Although the primary focus of the article is on the medical profession, many of the issues discussed can be applied to other professions where engagements follow similar structures.

Sources of income

The income tax issues arising depend largely upon whether a particular medical engagement is
one of employment or one of self-employment (the relevant income assessable under Schedule E or D respectively). This position is seldom more indeterminate than within the medical profession, given the structure and often short-term nature of the engagements undertaken.

Consider the following:

- A temporary contract to perform medical services at various hospitals

- Locum work for various health centres

- Part time lecturing at medical universities

- Infrequent articles written for medical journals

Which of the above would the Inland Revenue consider to be employment engagements with respect to United Kingdom income tax and national insurance contributions (NIC)?

The answer, rather surprisingly in the case of some of the above, is that they all could conceivably constitute employment engagements; it would be impossible to conclude in the absence of additional information.

The basic determinants of employment…

The Inland Revenue maintains in publication [IR56] that if an individual can answer ‘yes’ to the following questions for a particular engagement, then the individual will generally be an employee:

1. Do you yourself have to do the work rather than hire someone else to do it for you?

2. Can someone tell you at any time what to do or when and how to do it?

3. Are you paid by the hour, week, or month?

4. Can you get overtime pay?

5. Do you work set hours, or a given number of hours a week or month?

6. Do you work at the premises of the person you work for, or at a place or places he or she decides?

… and self-employment

In addition to the above, the following questions would be important in determining whether an engagement is one of self-employment:

7. Do you have the final say in how the business is run?

8. Do you risk your own money in the business?

9. Are you responsible for meeting the losses as well as taking the profits?

10. Do you provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves?

11. Are you free to hire other people on your own terms to do the work you have taken on?

12. Do you pay them out of your own pocket?

13. Do you have to correct unsatisfactory work in your own time and at your own expense?

This is not a definitive list of determinants; other issues may be relevant depending upon the particular engagement and quite often a mixture of yes and no answers will apply.

Fortunately, case law can provide some useful insights into the relative weighting/importance of the above ‘determinants of employment’ in situations where the position is not straightforward.

Applying these determinants to a particular profession

Some of the determinants listed above (for example 9 and 13) may have less relevance to medical professionals given the difficulty in the measurement of ‘losses’ and the inability to correct unsatisfactory work. One would be forgiven for asserting that more relevant to the medical profession would be the consideration of who pays for negligence insurance but [Bhadra v Ellam (1988)BTC25] has shown that the responsibility for payment of such insurance is not sufficient in isolation to show that an individual is self-employed.

Working for the NHS

[Mitchell and Edon v Ross (1959-1961)40TC11] provides authority that appointments with the NHS would generally constitute employment; the argument is based largely upon the issue of control and the ability of the NHS to dictate the manner in which services are performed.

However, does the NHS actually have the right to control the working methods of a medical professional engaged at a medical institution?

This would depend upon the following:

- How much time is spent with NHS patients? A particular engagement may require a proportion of time to be spent with NHS patients and a proportion with private patients. It is automatic that the NHS has less control over an engagement if a predominant amount of time is spent with private patients.

- What degree of experience/skill is possessed by the medical professional? Certain professionals would require less supervision than others would; as an example [Bhadra v Ellam] provides authority that the position of hospital consultant would generally not require supervision, direction or control.

- The precise terms of the contract and other documented procedures with respect to control in NHS engagements would also be relevant.

It is interesting that a right to control working practices need only be possessed by an institution; the right does not have to be exercised [Inland Revenue Employment Status Manual (ESM)1015].

Authority has also been provided in English case law that control does not have to be direct and could be delegated to a third party [Global Plant Ltd v Secretary of State for Social Services (1971)1QB139].

How important is control?

It is clear from the above section that control features significantly in ascertaining whether an engagement is one of employment or self-employment and the cases of [Hall v Lorimer 1993)BTC 473] and [Fall v Hitchen (1965-1975) 49 TC 3] amongst others support the fact that control is an extremely important determinant. It is in fact difficult to define what is meant by an ‘employer – employee relationship’ without some mention of control.

However, there are of course many other determinants in addition to control and [Market Investigations Ltd v The Minister of Social Security (1968)2QB173] summarises the position quite effectively:

‘The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.’

The inference is that one should consider all of the determinants of employment together.

Locum tenens

[ESM4062] outlines the Inland Revenue position with respect to Locum work. The medical professional would generally need to be engaged as a substitute as opposed to an assistant to be treated as self-employed; the income of an assistant is likely to be assessed under Schedule E.

A doctor supplied by an agency to cover another doctor in general practice (GP) would not ordinarily be regarded as subject to supervision and as such the fees received would be assessable under Schedule D case II. [ESM4061]

The comments in the above sections with respect to control would of course be equally relevant to locum work but another risk that may arise stems from the fact that locum engagements are frequently arranged through an agency.

Medical engagements arranged through an agency

An agency may be treated as an employer if services are provided to a medical institution through the agency in such a way that the medical professional is not an employee of either [Section134ICTA88]. In such circumstances the payer (which may be the agency and not the medical institution receiving the services) should operate PAYE.

The agency may be treated as a secondary contributor for NIC purposes by virtue of [SI1978/1689/Regulation5], and Inland Revenue NIC publication [CA25] specifies that an agency with a place of business in Great Britain will generally be treated as an employer if all of the following are true:

- The agency arranges all of the relevant engagements

- The individual cannot get someone else to do the work

- Someone has the right to tell the individual how to do their work (such a right need not be habitually exercised)

- Either the agency makes payments to the individual/instructs another party how much should be paid or the institution makes payments to the agency for arranging to provide the individual’s services.

Note that [ESM2002] concedes that the Inland Revenue “do not think many agency contracts will turn out to be contracts of employment but the possibility should not be overlooked”.

Part-time engagements

Medical professionals working in part time/temporary contracts may be treated as an employee by reference to the determinants of employment; the period of the engagement is largely neutral in this debate [Sidey v Phillips (1987)BTC121]. Inland Revenue publication [IR56]
further states in this regard that “the same considerations to determine employment status will apply even if you work part-time or for a short period”

Why is the Employment/Self-employment distinction important for tax purposes?

It is apparent from the above discussions that there is much disagreement as to what does and does not constitute employment but why does the distinction matter?

General income tax and NIC issues

- Income tax levied on Schedule E income would generally be payable on a monthly basis under

a system of PAYE, whereas income tax (and Class 4 contributions) on self-employment income would fall due under the payments on account system. Therefore, employment can present a cash flow disadvantage for tax payments.

- Class 2 (£2 per week) and Class 4 contributions are due on self-employed income as opposed to Class 1 on employment income. Class 4 contributions are currently assessed at 8% on profits (after allowable expense deductions) where as Class 1 contributions are assessed at 11% on gross income (no deductions). The upper earnings limits for Class 1 and Class 4 are now equivalent.

- Class 1A and Class 1 employer contributions would not be applicable to a self-employment engagement.

- A self-employed earner is responsible for ensuring that all tax/NIC amounts are paid; PAYE will not apply. This of course presents the possibility of unwelcome penalties and interest for the individual on any underpaid tax.

Expenses incurred

Aside from the tax issues outlined above, Schedule D provides much greater scope for claiming expense deductions. Expenses need to be incurred wholly and exclusively in relation to the engagement rather than wholly, exclusively and necessarily as for Schedule E deductions.

The following case law examples demonstrate the reduced scope for expense deductions under Schedule E medical engagements:

- The attendance of lectures relating to medical engagements for the better performance of duties would generally not be allowed as a deduction. [Humbles v Brooks (1959-1963)40TC500]

- Expenses incurred on medical journals and publications would generally not be allowed. [Smith v Abbott and related appeals (1994)BTC66].

- Employees are free to choose the manner in which they keep up to date with their professional field and as such the expenses incurred were not necessarily incurred. Note that this would be the case even if an institution required a medical professional to undertake such reading, as conditions must be imposed by the employment itself and not the employer [Brown v Bullock (1959-1963)40TC1].

- A General Practitioner employed at various hospitals part-time would generally be unable to claim a deduction for the cost of travelling from home to the hospitals or hospital to hospital. Such costs are not considered necessary for the proper performance of employment duties [Parikh v Sleeman (1990)BTC142].

- Smart clothing purchased for a medical engagement may not be allowable as the expense is arguably incurred for warmth and decency as well as employment and as such has a dual purpose [Malallieu v Drummond (1987)BTC142]. Long white coats that had no practical use outside of the medical engagement may be allowed.

Benefits

Benefits provided to an employee of a medical institution may be assessed to income tax and NIC.

Hospital Accommodation provided would generally not be assessable, as this would be considered necessary for the proper performance of duties. Subscriptions to professional medical bodies paid, late night travel paid, medical training expenses paid and medical check ups provided are other examples of non-taxable benefits that may be relevant to a medical professional.

Income from the publication of articles

A medical professional may have a casual agreement with a medical journal to write articles but how is income generated from this engagement likely to be assessed? The answer is that such income could be assessed under Schedule DI, E or DVI.

DI

The frequency of articles published may give rise to a trade. It would be possible to deduct the cost of items such as a home computer or a proportion of certain household expenses relating to a room (e.g. a study) used wholly and exclusively for the purpose of writing articles.

Employment

The above discussions relating to the determinants of employment highlight that a seemingly casual engagement to submit articles to a medical journal on an infrequent basis could still constitute employment. It would be necessary to examine the terms of the engagement, such as the consequences of non performance of obligations, and also necessary to examine the degree of control exercised by the journal over such items as technical content, frequency of articles submitted, presentation, hours worked per week etc.

DVI

Notwithstanding the above, casual articles written for various medical journals would generally be treated as Schedule DVI income. S.69ICTA88, states that tax will be charged to DVI “on the full amount of the profits or gains arising”. The method in which such profits or gains are determined is distinct from the “wholly and exclusively” requirement for DI expenses. Arguably there is increased scope for claiming expense deductions under Schedule DVI, as was discussed by Daron H Gunson in the CIOT commissioned report ‘Tax Nothings’
[http://www.tax.org.uk/attach.pl/245/111/Tax%20nothings%20complete.doc].

Voluntary work in the medical profession

A medical professional may undertake an element of voluntary work and if there is no income, then there can by definition be no income tax.
However, if expenses incurred over the course of the voluntary engagement are reimbursed and the amount reimbursed exceeds the amount actually incurred, the excess will be subject to income tax. In such situations, the individual will be required to declare the income on their end of year personal tax return and pay any income tax and NIC due (unless of course the individual is employed by the institution in which case PAYE must operate on the excess reimbursement).

Conclusion

There exists much uncertainty in determining whether an engagement for services is one of employment or self-employment; the distinction can have a dramatic impact on the timing and extent of income tax and NIC payments, and on the expenses that can be deducted in calculating taxable income.

The contract of engagement would be an excellent starting point in ascertaining which of the determinants of employment were relevant but it should be noted that oral or implied contract terms will need to be considered alongside any written contract terms. The actual practices followed would also be important – it would not be sufficient to simply formulate and sign a contract of employment if that contract were not adhered to in practice.

A medical professional with an appropriate level of seniority, such as a consultant who is engaged to cover periods of absence at various different hospital locations, would generally not fall to be treated as an employee. This is despite the fact that engagements may be arranged through an agency or performed on behalf of the NHS. However, even a casual engagement such as the writing of medical articles or infrequent lecturing at a medical institution or university could be challenged to be an employment engagement if the professional does not posses sufficient control over the manner and time in which services are performed. Similarly, if the professional does not ultimately incur a degree of independence and financial risk in the performance of services or flexibility in working hours, then it would be difficult to argue that the engagement were one of self employment.

It is therefore essential to consider all of the relevant terms of a medical engagement in parallel with the determinants of employment at the outset of the engagement to ensure that income is being assessed under the appropriate Schedule.

Shiv Mahalingham BSc(Econ) ACA CTA
International Tax Manager
PPD Global Ltd,
Telephone: +441223374268
E-mail: s.mahalingham@europe.ppdi.com