The exemption from the changes to the application of the IR35 rules may not be as straightforward as you think
As most contractors should now be aware, changes to the IR35 employment status regime are coming into effect in April, which will significantly alter the tax treatment of consultants using personal service companies (PSCs) to supply large and medium-sized businesses if they are inside the IR35 rules. The changes place the onus on those clients to determine whether their consultant falls within the IR35 regime, and provide them with a “status determination statement, or “SDS”. Where the consultant is considered to be within IR35, the “fee payer” must operate PAYE and National Insurance Contributions on the consultant’s behalf.
As previously discussed, for those working for “small” clients its business as usual, because the changes do not apply to “small” companies.
While the onus is clearly on client companies to understand the impact of the new regime on them, and where necessary determine their contractors’ IR35 status and issue an SDS, there’s no doubt that not all businesses have kept abreast of the upcoming changes. Therefore, it’s important to consider whether your client(s) are “small” or not, so you can understand the impact (if any) on your working arrangements from April.
What is a small company in the eyes of IR35?
For the purposes of the new regime, a “small” company is defined using the Companies Act 2006, and is one which meets at least two of the following three criteria:
- turnover of not more than £10.2 million;
- aggregate assets on the balance sheet of not more than £5.1 million, or
- not more than 50 employees.
This may not always be easy to access, particularly in the case of private businesses. In addition, it’s not always this straightforward – so here’s a quick guide to a few of the potential complexities:
- The financial criteria for a small business is based on the previous full year’s results; If your client is having a successful year or expanding rapidly, they may be moving into the medium-sized business bracket, and that could have significant implications for your contract and employment status next year.
- If your client is not a corporate entity, only the turnover test needs be considered.
- Make sure you understand your client’s business structure; If your PSC is engaging with a company that is part of a group, the financial criteria you need to test may be based on consolidated financial statements.
- Public companies are always regarded as medium or large for the purposes of the regime, regardless of their financial results.
- If your client is an overseas entity, unfortunately this doesn’t mean that your arrangement is exempt from IR35. The rules will still need to be considered, even though in reality, the client entity is likely to have little or no awareness of rules or their potential obligations under them!
The changes are coming into effect in less than two months, so while there’s still time to prepare, if you have any concerns about these issues, it’s important to act sooner rather than later.