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Finance: Taxing matters
New tax laws will hit the UK fitness sector in early April, changing the way freelance PTs are legally classified for income tax and national insurance, as Abi Harris reports
IR35 - four simple characters with a big impact for operators in the health and fitness industry. As the Chancellor left all mention of this impending tax change out of his March budget, this means private sector IR35 tax reforms officially hit our sector in April.
What is IR35?
IR35 is new tax legislation that means private sector employers will be responsible for assessing whether or not contractors need to pay income tax and national insurance contributions.
It will also compel operators to seek out ‘disguised employees’, or contractors with a permanent position at a company, who don’t pay the same income tax or national insurance contributions (NIC) as standard employees.
The purpose of IR35 is to collect the same amount of tax and National Insurance Contributions as would have been paid if an individual was employed directly.
It’s widely believed that IR35 changes could be disastrous for the self-employed, who are likely to be hit with additional costs, while companies – already grappling with the ongoing fallout from COVID-19 – will need to assess the likely impact of the new legislation on their businesses and move to accommodate the change.
What it means for our sector
IR35 will apply where personal trainers or instructors provide services to an organisation through an intermediary company, such as Joe Bloggs PT Services Ltd, or are supplied via an employment agency/business. The question to ask is ”if it wasn’t for that company in the middle, would the individual be regarded as an employee/worker for tax and NIC purposes?”
Health club and leisure centre operators engaging ‘off-payroll’ PTs and instructors via an intermediary will be responsible for determining their employment status and paying Income Tax and NICs for those deemed employees.
Aaron McCulloch is MD of Your Personal Training (YPT), which supports PTs and gym operators to deliver personal training services. He says: “Many PTs work in clubs as ‘off-payroll’ gym or class instructors via their own limited company in lieu of paying floor rent to operate their business; it’s been standard practice in our sector for many years.
“They’re often required to carry out inductions, group exercise classes or even cleaning, and would typically have to ask for time off and work their PT business around a shift rota set by the club.
“If a PT or instructor is obliged to deliver a set number of regular working hours and are told when, where and how they must do this, it’s likely HMRC would deem them an employee.”
Law firm, Irwin Mitchell, has been supporting companies dealing with IR35 across a number of sectors and senior associate, Padma Tadi, says: “The financial impact can be significant; amounting to thousands of pounds in additional income tax and NICs for every contractor HMRC would deem to be an employee.
“Operators will be responsible for deducting and passing on these charges, as well managing the increased costs and responsibilities attached to employment rights to which the individual may be entitled.
“The legislation applies to all invoices and payments made after 6 April 2021,” she says, “even if the work is carried out before that date and when passed on to PTs or instructors, this could reduce their net income by up to 25 per cent.”
The good news is these changes only apply to freelancers providing services via an intermediary company and they won’t apply to small organisations which don’t meet at least two of the following criteria:
● Annual turnover of more than £10.2 million
● Balance sheet total of more than £5.1 million
● More than 50 (F/T equivalent) employees
However, Tadi advises: “Beware when looking at size. If you’re part of a corporate group, the overall group turnover must be considered, or you may still fall within the scope.”
“Preparation is key, because assessing each team member and introducing and actioning appropriate policies and procedures can be extremely time consuming,” warns McCulloch.
"The financial impact can be significant, amounting to thousands of pounds in additional income tax and NICs for every contractor HMRC would deem to be an employee" – Padma Tadi, Irwin Mitchell
"If a PT or instructor is obliged to deliver a set number of regular working hours and are told when, where and how they must do this, it’s likely HMRC would deem them an employee" – Aaron McCulloch, Your Personal Training
1. Establish whether you fall within the definition of ‘small’. If so, you won’t ever need to make changes, provided you remain small.
2. Identify freelancers who operate via an intermediary and provide a status determination for each. Consider how often they work for you, whether they provide their own kit and if they work for other gyms.
3. Decide who in the team will be responsible for determining the status of freelancers. If they need training to understand how to make a proper assessment, HMRC has an online tool (known as CEST) to assist, but it has been subject to criticism for giving some inaccurate outcomes, so we advise also seeking professional advice.
4. Freelance PTs and instructors may challenge the status you allocate. Decide how you’ll deal with those appeals and how you’ll comply with the time limits (you have 45 days to respond to any appeal with your findings).
5. Will tax and NICs which are due be an additional cost for you, or can you renegotiate so this is factored into the PTs’ rates?
6. Review how the payment processes will work. The PTs’ invoices will need to be split between fee and VAT, with PAYE and NIC calculated on the fee and with a net payment made to the PTs and PAYE/NIC to HMRC.
7. Establish whether you need to set up a separate PAYE scheme to handle payments – they must be processed under the real-time information (RTI) arrangements.
8. Advise instructors you’re reviewing your processes. You may want to ask them to become employees if they are critical to your operation.
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