When the ‘off-payroll’ IR35 rules were extended to the private sector in April 2021, ‘small companies’ were excluded from the legislation. Here we explain how this exclusion works, and answer some frequently asked questions.
What is the small company exemption?
When the Government confirmed plans to extend the off-payroll rules to private sector firms in October 2018, the Budget documentation contained a notable exclusion for small company clients.
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 subsequent legislation confirmed that the definition is based on 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
Read the HMRC guidance here. The Off-Payroll legislation itself is contained in Chapter 10 of ITEPA 2003.
What should I do if my client is a ‘small’ company
Any contractors engaged by small companies should operate the IR35 rules as they would have done prior to the Off Payroll private sector extension in April 2021.
The responsibility for determining the employment status of workers remains with the contractor’s company, and does not pass to clients who meet the definition of a ‘small company’.
It is worth noting that any party in the contract supply chain can ask for confirmation from you (the contractor) that your client is exempt. Clearly, the client itself must provide confirmation that this is the case, if asked.
What happens if my client is part of a larger group of companies?
If a hiring company is part of a group and the parent company heading that group is considered a small business, then the hiring company can also be classified as a small business.
The Off Payroll rules state that the small business test must be applied to the entire group entity. This means looking at the total combined turnover and balance sheet of all connected businesses and persons, rather than just the individual hiring company.
Figures from all members of the group are included irrespective of whether group members are resident in the UK or not, so the worldwide group is considered.
Clearly, this qualification stops larger firms from setting up smaller subsidiaries purely for the aim of avoiding the IR35 rules.
See ESM10007 for the technical details relating to groups.
What happens if my ‘small’ client no longer meets the definition of ‘small’ in the future?
A company’s exemption from the IR35 rules ceases if the company meets two out of the three financial criteria (annual turnover, balance sheet total, and number of employees) for two years in a row.
If this happens, the previously ‘small’ company becomes responsible for determining the employment status of any workers starting from the tax year following the filing date of the financial statements for the second consecutive year when the criteria were met.
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