What Is IR35 and Why Does It Matter for Locum Dentists?
IR35 is the tax legislation that targets what HMRC calls "disguised employment". If you are a locum dentist working through your own limited company (a Personal Service Company, or PSC), but your working relationship with the engaging practice looks like employment, IR35 can apply. When it does, you pay income tax and employee National Insurance on the fees you invoice, as if you were on the payroll. The practice also faces employer NI and pension obligations.
For locum dentists working with NHS contractors, the stakes are high. A typical locum day rate of £400-£600 can attract significant tax adjustments if HMRC reclassifies the engagement as inside IR35. The rules changed in April 2021 for medium and large clients, shifting responsibility for determining status from the locum's PSC to the engaging practice. This article explains how IR35 applies to locum dentist NHS engagements, what "deemed employment" means, and what you can do to stay compliant.
How the Off-Payroll Rules Apply to NHS Dental Practices
The off-payroll working rules (often called IR35 for the public sector) were extended to the private sector from 6 April 2021. For locum dentists, the key distinction is whether the engaging practice is a "small" or "medium/large" client under the Companies Act 2006 definitions.
A practice is small if it meets at least two of these criteria in the current or previous financial year:
- Annual turnover of £10.2 million or less
- Balance sheet total of £5.1 million or less
- 50 employees or fewer
Most single-handed NHS practices and small partnerships will be small. Multi-site groups, corporate-owned practices, and larger partnerships are likely medium or large. If the practice is medium or large, it must decide whether the engagement is inside or outside IR35. If it is small, the locum's PSC retains the responsibility for determining status.
This distinction matters because the consequences of getting it wrong differ. If a medium/large practice incorrectly treats a locum as outside IR35, HMRC can pursue the practice for unpaid tax, NI, and interest. If a small practice incorrectly treats a locum as outside IR35, HMRC pursues the PSC.
What Does "Deemed Employment" Mean for a Locum Dentist?
If HMRC determines that a locum dentist is inside IR35, the fees paid to the PSC are treated as "deemed employment income". The PSC must deduct income tax and employee NI before paying the locum. The engaging practice (if medium/large) must also account for employer NI and, in some cases, the apprenticeship levy.
For a locum dentist earning £50,000 per year through a PSC, being inside IR35 means approximately £7,500 in additional tax and NI compared to a genuine self-employed arrangement. The PSC also loses the ability to extract profits via dividends at lower tax rates, because the deemed salary eats into the profit pool.
There is no employer pension contribution obligation under IR35 for the engaging practice unless the contract explicitly provides for it. But the locum loses access to the NHS Pension Scheme unless the practice offers it as part of a salaried arrangement, which is rare for locum engagements.
How HMRC Tests Whether a Locum Dentist Is Inside or Outside IR35
HMRC uses the same employment status tests that apply to any worker. For locum dentists, the critical factors are:
- Control: Does the practice dictate when, where, and how you work? A locum who sets their own hours, chooses which surgeries to work in, and decides treatment plans independently is more likely to be outside IR35.
- Substitution: Can you send a qualified replacement if you are unavailable? Genuine substitution rights are strong evidence of self-employment. Many locum contracts prohibit substitution, which weakens the case.
- Mutuality of Obligation (MOO): Is the practice obliged to offer work, and are you obliged to accept it? Locums who work a regular weekly session under a rolling contract have stronger MOO than those who accept ad-hoc bookings.
- Financial Risk: Do you bear financial risk? Locums who provide their own equipment, pay for their own indemnity, and cover their own CPD costs demonstrate self-employment. Those who use practice equipment and have expenses reimbursed look more like employees.
- Integration: Are you part and parcel of the practice? A locum who attends practice meetings, uses practice email, and wears practice-branded scrubs is more integrated and more likely to be inside IR35.
No single factor decides the outcome. HMRC and tribunals look at the overall picture. A locum dentist who works three days a week at the same NHS practice, uses practice equipment, has no substitution rights, and attends staff meetings is at high risk of being inside IR35, regardless of what the contract says.
Practical Steps for Locum Dentists Working with NHS Contractors
If you are a locum dentist working through a PSC and engaging with NHS contractors, take these steps to manage IR35 risk:
- Review your contract and working practices annually. A contract that says "outside IR35" means nothing if the reality is different. HMRC looks at what happens, not what is written.
- Use a Status Determination Statement (SDS). If the engaging practice is medium/large, it must provide an SDS explaining why it has decided inside or outside. If the practice is small, ask for a written confirmation of its size and request an SDS voluntarily.
- Build evidence of self-employment. Keep records showing you control your schedule, provide your own instruments or materials, bear financial risk, and have the right to substitute. If you cannot substitute, document why (e.g., "no suitable qualified locum available on short notice" is a valid commercial reason, not a bar to self-employment).
- Consider an IR35 review. A specialist dental accountant or employment solicitor can review your contract and working practices and give a written opinion. This is not a guarantee, but it helps if HMRC challenges you later.
- Check your indemnity insurance. Some locum-specific policies include IR35 protection or legal expenses cover for HMRC enquiries.
For locum dentists who are genuinely self-employed, the key is to ensure the working relationship matches the paperwork. If you are effectively an employee, consider whether a salaried associate role with NHS Pension access might be more suitable financially.
What Happens If HMRC Finds You Inside IR35?
If HMRC determines that a locum dentist was inside IR35 for a past engagement, the consequences depend on who made the determination.
For engagements with medium/large practices, HMRC will pursue the practice for unpaid tax, NI, and interest. The practice may then seek to recover the cost from the locum's PSC under the contractual terms. This can lead to disputes and legal costs.
For engagements with small practices, HMRC pursues the PSC directly. The PSC faces a tax bill for the deemed employment income, plus interest and penalties. Penalties can be up to 30% of the tax due for careless errors, or higher for deliberate non-disclosure.
HMRC can go back up to six years for non-deliberate errors, and up to 20 years for deliberate concealment. For a locum dentist who has been operating outside IR35 for several years, the potential liability can be substantial.
Should Locum Dentists Operate Inside IR35?
There is no legal barrier to operating inside IR35. Some locum dentists choose to accept inside-IR35 engagements because the practice offers a higher day rate to compensate for the tax and NI costs. The PSC still invoices the practice, but the PSC must then process the deemed salary through payroll, deducting tax and NI.
If you operate inside IR35, the PSC's retained profits are lower, but you still have the benefit of limited liability. You also retain the ability to claim certain expenses against the PSC's non-deemed income (e.g., dividends from other sources). However, the administrative burden is higher, and you lose the tax advantages of dividend extraction on the deemed salary.
For most locum dentists, the goal is to remain outside IR35 where possible. But if the engagement is genuinely employment-like, accepting inside-IR35 treatment is better than facing a retrospective HMRC challenge.
How Dental Finance Partners Can Help
IR35 is a complex area, and the facts of each locum dentist's engagement differ. A specialist dental accountant can review your contracts, working practices, and tax position to help you determine your IR35 status and plan accordingly.
If you are a locum dentist working with NHS contractors, we recommend speaking to a dental-specialist accountant who understands the nuances of NHS engagements. They can help you structure your affairs to minimise risk and ensure compliance.
For more guidance, see our dedicated page for locum dentists and our locum dentist tax services. You can also use our locum cost-benefit calculator to compare the financial impact of inside vs outside IR35 engagements.