When the ‘off-payroll’ IR35 rules are extended to the private sector in April 2020, ‘small companies’ will be excluded as things currently stand. However, the exclusion itself may cause more complications for clients to deal with.
What is the small company exemption?
When the Government confirmed the April 2020 private sector extension of the off-payroll rules in October 2018, the Budget documentation contained a notable exclusion for small companies.
Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.
Although there was initially some confusion over the definition of the term ‘small’, the Government has since confirmed that it will use the same criteria contained in the Companies Act 2006.
During a 12-month period, a business is deemed to be a ‘small’ company if it meets 2 or more of the following criteria:
- Turnover – not more than £10.2 million
- Balance sheet total – not more than 5.1 million
- Number of employees – no more than 50
Any contractors engaged by small companies will continue to operate the IR35 rules as they do currently – and the responsibility for determining their employment status will not pass to their clients.
Why the small company exemption is causing new problems
Here, Chris James, head of accounting at JSA, explains why this exemption has increased confusion for organisations already struggling to understand the implications of the April 2020 implemetation.
The consultation proposes the use of Companies Act size limits to classify end-users as small or otherwise. It does not ask an explicit question about this approach other than a very narrow question about applying parts of this test to unincorporated entities. It is not clear why this is, as the assessment of company size is critical to the law – if you are small, the rules don’t apply.
The Companies Act rules allow for a small subsidiary of a large group to be classified as small – this would get around the rules, allowing large end users to form small, exempt subsidiaries. From round table events, I understand HMRC are putting in anti-avoidance rules to counter this, which is sensible. However, it is notable that rather than staying with the Companies Act rules, for simplicity, we are already diverging from them, which is going to add to the confusion of applying them.
The Companies Act rules are regularly misapplied by accounting professionals. In addition, size criteria are determined retrospectively in the normal course of business. Here, the reform is intending to exclude small business from the reform, which has merit. However, the process of deciding who is small and who is not is not defined. This will lead to increased confusion, and the rules being misapplied.
Possible solutions (and more questions)
The following needs to be confirmed urgently to allow businesses to plan:
- Who decides on size – the supply chain? If so, how can they ensure they get up to date information? Should they look at Companies House? What if the accounts have been prepared under the wrong size criteria? If the next accounts are overdue, with a possible size change, what should the supply chain do?
- If the end user decides, do they in some way self-certify? Then who is liable if this certification is wrong? Should HMRC certify?
I have suggested at round tables that an online tool alongside CEST should be developed to allow the accurate categorisation of an end user. This, taken alongside the requirement to decide if services have been outsourced (so that the end user moves down the chain to the service provider, who will be in scope according to the consultation under the new rules) will lead to unnecessary confusion and expense as supply chains have to fulfil this new requirement, and evidence their fulfilling of it.
As to the choice between turnover and / or employees as a criteria for non-corporates, passing the threshold on both simultaneously seems just, based on the similarities this would have to the criteria for incorporated businesses. Balance sheets are easier to manipulate than turnover and employee numbers.
It is worth noting that of course employee volumes are probably not the best size criteria for these rules – but we are applying something designed for company statutory reporting purposes to an engagement tax – which again highlights the non-joined-up approach of these rules more generally.
