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The Taxman Will See You Now, Doctor: Reforming the Tax Status of NHS Locums

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About The Author

Adiba Firmansyah (Regular Writer)

Adiba is currently studying for her LLB at Middlesex University, Dubai. Her main areas of interest are human rights and public law. Outside of the law, Adiba enjoys running, cycling and drawing.

The NHS is the closest thing the English have to a religion.

Nigel Lawson

Alongside caring for more patients than ever before, some doctors and nurses working for the NHS have also faced major and troubling changes to their employment and tax statuses. Locums (temporary stand-in doctors and nurses) can now be taxed as though they were employees.

This is because reforms to the UK’s anti-avoidance tax legislation – known as IR35 – have effectively made public sector organisations like the NHS responsible for enforcing their workers' compliance with the rules. This is a change from the previous state of affairs, whereby it was the worker who could determine their own employment status.

The purpose of IR35 is to crack down on perceived tax avoidance. However, the recent reforms have had the effect of some locums stopping work altogether, at a time when the NHS is already showing signs of strain. It is crucial for these locums' views to be heard: the increase in tax has meant that, for these workers, it no longer makes financial sense to keep working. Little wonder, then, that legal challenges are being brought, asking the government to protect locums from unfair treatment and economic harm.

This article will examine the situation. After considering the NHS’s justifications for the reforms, and the problems that appeared following their introduction, it will discuss the legal challenges that locums have brought and assess whether the recommendations they have put forward will encourage a fairer, less indiscriminate application of IR35.

The IR35 Tax System

The IR35, introduced in 1999, is designed to prevent tax avoidance. It aims to stop workers from supplying work through intermediaries in a way that would otherwise allow them to bypass being designated an employee and paying the resulting tax. Termed ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC), those workers who fall under the provisions of IR35 are required to pay income tax and National Insurance Contributions (NICs) as if they were employed.

From April 2017 onwards, IR35 status is to be determined by the client (in effect, the employer), not the contractor (in effect, the employee). This sees the client being held legally responsible for making that determination, such that employers – like the NHS – are now liable if it determines the employment status of its workers incorrectly.

In light of this, it is understandable that the NHS has taken a risk-averse approach that involves applying IR35 in all instances, to the extent that all workers who could potentially fall within its provisions are automatically listed as employees. This saw NHS Improvement – the health service’s regulator – instruct all NHS trusts to apply the IR35 as if it were a ‘blanket rule’, and categorise all agency staff, including locums, as employees.

The NHS' Blanket Rule

The Impact of the Blanket Rule on the NHS

There is a marked contrast between the position of locums and employed NHS doctors and nurses. For one thing, NHS employees are entitled to employment rights including sick pay and maternity leave which further reduces the viability of contract work. However, the loss of these rights must be weighed against the benefits of being a locum: greater flexibility and a right to use their own free time as they choose.

But the impact of a locum falling under IR35 alters this balance: it means, above all, that a locum takes a significant hit to their wages. The financial damage resulting from being classed as part of IR35 can see losses of between 30% and 50% lost from a locum’s wages.

This has seen locums begin to seriously consider the idea of leaving the NHS altogether and moving to private practice. In November 2017, a poll of 537 Independent Health Professionals’ Association (IHPA) members found that around 50% would consider working outside the EU, and 32% were prepared to move to other countries in the EU, if they were to be given IR35 tax status.

The obvious effect of such an exodus would be the worsening of the well-documented current skills shortages faced by the NHS, which – as rising demand for medical skills has outstripped the numbers of doctors – has seen departments temporarily cease operations or operate without the necessary expertise. Further reductions in the number of healthcare professionals would take its toll on patient safety that is already suffering: 87% of respondents to the IHPA poll agreed that patient care has already suffered after the reforms. This is supported by figures showing that 28% of locums left as a direct result of being classed as falling within IR35 after the reforms.

Being classed as falling within the IR35 has had one final consequence that indirectly impacts upon the quality of patient care. A survey taken by Contractor Calculator discovered that there is an increasing number of NHS doctors and nurses in treatment for anxiety and depression; skills shortages caused by reduced doctor numbers are taken their toll on the strain that staff already face. Nor is this strain limited to the workplace – some locums are deep in debt as a result of IR35. Tax laws may have been reformed, but doctors’ and nurses’ monthly payments (including mortgage repayments) remain tied to their wages.

Familiar Problems: Tax Avoidance Schemes

Taking advantage of the chaos caused by the blanket rule, some companies began offering locums a choice of tax avoidance schemes that – they claim – are able to increase income to mitigate the fact that pay has been hit by IR35. This is somewhat ironic: given that IR35 was meant – in the first place – to prevent tax avoidance schemes, the rise in their use has arguably caught HMRC offguard. Ben Itsuokor, the President of the IHPA, has expressed his concerns with these schemes, on the grounds that:

[S]tories have now emerged revealing that vulnerable locums are being encouraged towards unsustainable, questionable tax arrangements which could leave them facing life-changing tax bills long-term.

The arrangements offered usually involve a locum’s wage being paid to an offshore trust, purportedly in the form of a loan. In theory, this loan is to be repaid but, in practice, it is not.

Though companies selling these schemes argue that they are still complying with HMRC’s rules, the HMRC in 2010 began to crack down on these schemes. However, after the 2017 reforms, many new schemes sprang up. As the Daily Telegraph has reported, the director of a payroll services company alleges that at least 20 companies have begun offering offshore loans. Many locums are not aware that these services could be illegal. This has not stopped recruitment agencies recommending such schemes to locums, pointing to a lack of suitable guidance from HMRC.

Justifying the NHS’s Blanket Rule

Even before regard is hard to the problems it caused, whether it was necessary to bring in a blanket rule was highly questionable. As Seb Maley from Qdos Contractor, has observed:

Many public sector organisations have started to be more pragmatic and these people are still working outside IR35. In the NHS it’s a different story.

Nevertheless, the NHS sought to mitigate the effects of its blanket rule is by ensuring that – on the whole – they pay locums more than employees; in this way, locums are compensated for not receiving the benefits of employment and the stability of being on the payroll. This should have, in theory, lessen the impact of IR35 on their pay packets.

However, Dave Chaplin from advice site Contractor Calculator, has calculated that – even with the higher pay packets being taken into account – locums falling within IR35 only retained 70% of their pay after tax and NIC deductions. Given that the figure for NHS employees is 73%, locums were therefore parting with a higher proportion of their wages. 

The government has also defended IR35 by arguing that it simplifies the tax process. Yet this has not been true in practice: tax experts and business leaders have contended that IR35’s poorly thought-out rules and HMRC’s ineffective implementation harms many people who are genuinely self-employed.

Indeed, the ineffectiveness of the scheme has led to several cases of healthcare workers being excessively burdened with debt. As the Daily Telegraph has documented, one of the more extreme cases concerned a social worker in her 60s who was issued with a six-figure tax demand as a result of the IR35 reforms, and who was unlikely to be able to repay it.

The Removal of the Blanket Rule and the New Case-by-Case Policy

The government finally acknowledged the failings of the reforms of IR35 after multiple legal challenges brought by groups of health professionals. Indeed, the outrage following the reforms prompted two unions – the Locum Doctors Union (LDU) and the Healthcare Professionals Union (HPU) – to bring judicial review proceedings, claiming that the NHS’s blanket rule is unlawful. They also argued that the HMRC has breached the rules of natural justice by failing to have an appeals process in place for anyone wrongly deemed to be within IR35.

Though these proceedings are currently in the Pre-action Protocol stage – in which the parties will try to settle the dispute without resort to litigation – the threat of judicial review has, in itself, proved to be effective in making the NHS listen. In April 2017, the NHS made a U-turn on locums’ IR35 status. It accepted that the blanket rule it had adopted was not the correct approach, and introduced a policy of that involves taking ‘reasonable care’ and deciding IR35 status on a case-by-case basis.

Unfair Assessments: Misusing the IR35 Employment Tools

While this change of policy may prima facie resolve problems stemming from the false categorisation of locums, few have greeted these changes enthusiastically. For example, Shaun Critchley – head of contractor services company ADVANCE – cast doubt on the NHS’s new way of looking at tax status, raising concerns about whether NHS trusts will be able to find the time for careful case-by-case scrutiny of every contractor’s IR35 status.

Unions have also been taking the NHS to task: the LDU and the HPU have contended that – since adopting the new case-by-case policy – the NHS have failed to ‘fairly and accurately’ review the tax status of locums; they have alleged that the staff appointed by the NHS are not qualified to carry out the assessments.

Indeed, a case brought against the NHS in May last year centered on the NHS's refusal to accept the employment assessments that had been self-completed by a locum doctor. Though these assessments suggested that her contract was not caught within IR35, the NHS disagreed and subsequently refused to hire her. The NHS insisted on using their own assessments of her contract through the HMRC’s Check Employment Status for Tax (CEST) tool, which concluded that the locum fell under IR35.

The CEST tool involves asking contractors questions about the nature of their personal services. HMRC designed its tool to ensure that contractors fall outside of IR35 only in cases of absolute certainty, whereby the personal services they are offering clearly do not meet that necessary for employment status.

However, by focusing solely on the concept of personal services, HMRC’s IR35 tool does not validly account for one of the fundamental requirements of employment law that sees the establishment of an employment relationship only after a wide range of aspects of the relationship between the purported employee and employer are taken into consideration. Indeed, in the landmark case of Hall v Lorimer [1993], Nolan LJ outlined the process by which employment status cases should be judged:

In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity... The overall effect can only be appreciated by standing back from the detailed picture... and by making an informed... appreciation of the whole.

Nonetheless, the NHS insists on applying the CEST tool without taking these concerns into account. It places weight on the fact that, from an administrative standpoint, the CEST tool allows employment status to be determined quickly, if not accurately. Indeed, a spokesperson for NHS Improvement downplayed the concerns and pointed to updated guidance on the IR35 rules which ensures that there is no ambiguity in what the NHS are expected to do.

Despite these reassurances, ambiguity is still rife. In March 2018, Jolyon Maugham QC predicted that the Digital, Media and Sport Select Committee would investigate misapplications of IR35 in order to examine whether the NHS was right to force everybody to be taxed as employees, even though it can be shown that very often those people should have been taxed as self-employed individuals. MP scrutiny will also hopefully focus on the CEST issues and the tax company controversies.


Recommendations for, and avenues to, reform have already been made: the IHPA, for example, have demanded a public enquiry be carried out into the impact IR35 has had on the NHS workforce. Indeed, it contends that this should be linked to a further investigation into the availability of life-saving doctors and nurses, arguing that:

[I]t seems probable that acute on chronic staffing shortages are exacerbated by ‘forced false employment’ [which] could be a potentially contributing factor to increased mortality.

Indeed, referring to the most recent NHS crisis – in which there were 10,000 excess deaths in the first seven weeks of 2018 – the IHPA is seeking to understand the reasons behind this increase in mortality. In particular, it is asking for an assessment of whether IR35 has had a role in this by reiterating the importance of keeping locums onboard. In all, this recommendation encourages a clear, hard look at the direct consequences IR35 has on patients.


The NHS is losing its locum doctors and nurses as a consequence of the IR35 tax reforms. Legal challenges have been successful in making the NHS realise that it has a problem, but only to a limited extent. It is, however, not only locums but their patients who are vulnerable to the strain from staff shortages. Reclassifying locums, once more, as falling outside of IR35 could ease the burden on the NHS by making contract work viable again.

Mainly though, the problems stems from an absence of guidance from the HMRC. Its 2017 reforms have – for example – not made doctors any less vulnerable to unscrupulous tax companies offering ways around IR35.

Ultimately, this makes it clear that more care is needed when assessing the employment and tax statuses of locums. Given the state of the NHS budget, they are unlikely to be able to afford to take this care. But since stand-in health workers have always been key players in providing timely, adequate care to patients, it is now up to the NHS to remind itself of the value of locums’ work.

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Tagged: Litigation, Medical Law & Ethics, Public Law, Regulators, Tax Law, Trusts

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