IR35 for Small Companies

Are you considered a small company? Does IR35 apply and what are your obligations under the off-payroll rules? Find the answers here

Since IR35 reform was announced for implementation in the private sector, implemented as of 6th April 2021, there was a flood of information surrounding the off-payroll rules for businesses to seek advice from.

However, whilst most conversations were centred around who will be the decision-maker and who will be the fee-payer, as well as the manner in which these rules were to be implemented – it seemed that for many businesses, the small companies exemption had largely been missed.



What is the Small Companies Exemption?

The off-payroll rules only apply to businesses that are in the public sector, or private sector businesses classed as medium or large according to the criteria as set out in the Companies Act 2006. This is defined as a business which meets 2 or more of the following conditions:

  • An annual net turnover of more than £10.2 million
  • A balance sheet total of more than £5.1 million
  • More than 50 employees

Therefore, if you are the end user and your business cannot meet two out of the three conditions above, it is classed by HMRC as being a small business and as such the off-payroll rules will not apply.



What if my business is part of a larger group of companies?

The small companies criteria applies to the aggregate position of a group of companies using the definition of the Companies Act 2006, and so even if your business in isolation is classed as small but is part of a wider group, you may still need to consider the off-payroll rules.


 

What if my business is small now but becomes medium/large in the future?

The small companies exemption no longer applies when your company meets two of the three criteria set out above for two consecutive financial years. If this happens, you are responsible for applying the rules from the tax year after the filing date of the second consecutive year.

For instance, a company with a year end of 31st December which ceases to be ‘small’ in both 2020 and 2021 will start applying the rules from 6th April 2023 (which is the tax year after the filing date of 30th September 2022).

It is important to be looking ahead and start planning early; communicate with suppliers – what are they doing with other clients? Think about your contracts and working practices of your contractors- are these IR35 compliant /friendly? Establish your own IR35 risk profile and assessment strategy ahead of time.

Orion has a long history of working with Qdos on IR35 matters. With provision of an easy to use interface and realistic response timelines, Orion has been delighted with the services provided by Qdos, who has carried out many IR35 assessments and implemented a range of solutions for various clients.

Ross MacRae

IR35 and the Small Companies Exemption

Are there any IR35 obligations for a small company?

What this means for the businesses that are classed as small by HMRC is that if they choose to engage the services of a contractor who operates through their own limited company then they will not be required to decide the employment status of the workers that they engage.

The employment status decision will continue to rest with the worker’s intermediary i.e. their limited company as it does now under the current rules.

It should be noted however that the limited company, worker or third party supplier such as the recruitment agency placing the limited company contractor, can ask for you to confirm the size of the business in order for them or their agency or anyone else in the contractual chain to know what rules apply, and you will be legally required to provide this information.



Can I avoid IR35 by restructuring to meet the small companies criteria?

A structural change which has been made without a genuine business reason and simply to avoid the off-payroll rules could be seen as either a deliberate or deliberate and concealed action on the part of the business. As is true with any element of the IR35 legislation, HMRC are likely to see through any such contrived arrangement.

In our view there is a strong risk that if a business falsely claims that it is classed as a small business and HMRC become aware of this and decide that the small business exemption does not apply, then not only does the business risk the worker’s tax and National Insurance liabilities being passed to them, they also run the risk of incurring penalties of between 30% and 100% on any additional tax and National Insurance liabilities.



What processes can we implement to ensure compliance now and in the future?

Even if you are considered a small company now – it is important to appoint a company representative for responsibility regarding IR35 (preferably somebody who will have sight of the company accounts) so that any change can be flagged with sufficient time to prepare.

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IR35 Status Review

Assess the IR35 status of your off-payroll workers fairly and compliantly with the Qdos Status Review platform. We assess workers based on two decades’ of experience handling enquiries and completing assessments, and insure the risks involved whilst ensuring your obligations are met under the off-payroll working rules.
Why Qdos?
We’re leading experts on employment status, introducing the first compliance tool for the off-payroll working rules (IR35 reform).

Our knowledge and experience of IR35 and the  contracting industry simply can’t be beaten.
With Qdos commercial services, you benefit from:
Bespoke solutions
We tailor our services to the specific needs of your organisation
Trusted insurance provider
We’re part of leading specialty insurance group, Tokio Marine HCC
Excellence in compliance
We didn’t win the Queen’s Award for Innovation for nothing!

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