Does IR35 Apply to Small Companies? Get the Facts.

IR35 is a set of tax rules in the UK that determine whether contractors are genuine self-employed individuals or employees for tax purposes. The rules were introduced in 2000 to prevent tax avoidance by individuals who were working as contractors through an intermediary, such as a personal service company.

The recent changes in legislation mean that the responsibility for determining IR35 status and complying with off-payroll working rules now falls on the end client, rather than the contractor or intermediary. As a result, small businesses may be wondering whether IR35 applies to them and what they need to do to stay compliant.

So, does IR35 apply to small companies? The answer is yes, it can. However, small companies can qualify for a small companies exemption if they meet certain conditions. It is important for businesses to understand the exemption and the off-payroll working rules to ensure they are compliant with the legislation.

Key Takeaways

• IR35 is a set of tax rules in the UK that determine whether contractors are genuine self-employed individuals or employees for tax purposes.
• The recent changes in legislation mean that the responsibility for determining IR35 status and complying with off-payroll working rules now falls on the end client, rather than the contractor or intermediary.
• Small companies can qualify for a small companies exemption if they meet certain conditions.
• It is important for businesses to understand the exemption and the off-payroll working rules to ensure they are compliant with the legislation.

Understanding IR35 and Off-Payroll Working Rules

IR35 is a term used to describe the UK tax legislation that targets contractors who work for clients via an intermediary, such as a limited company or personal service company. The legislation was introduced in 2000 to combat what HMRC calls “disguised employment,” where individuals work on a self-employed basis but behave more like employees, thereby avoiding paying income tax and national insurance.

The off-payroll working rules, commonly known as IR35 rules, apply to all public sector clients and medium or large private sector companies using the services of a contractor through an intermediary. The rules require the end client to determine whether IR35 applies to the contractor’s company before making payments. If the rules apply, the end client or the intermediary must deduct and pay income tax and national insurance contributions to HMRC.

The determination of IR35 status is based on the contractor’s employment status and working practices. HMRC uses a set of criteria outlined in chapter 10 of the Employment Status Manual to assess the level of control, supervision, and direction the contractor receives from the end client. The assessment also considers the contractor’s financial risk and the presence or absence of factors suggesting an ongoing relationship between the contractor and the end client.

It is the responsibility of the end client to issue a determination statement outlining whether IR35 applies or not, along with the reasoning behind the decision. If the contractor disagrees with the decision, they have the right to request a review of the determination statement.

The rules for off-payroll working apply at the start of the tax year following the filing year in which the supply chain applies. For instance, the new off-payroll legislation that came into effect in April 2021 applies to payments made on or after 6 April 2021. The rules must be applied by any client who meets two or more of the following conditions:

• The client has an annual turnover of more than £10.2 million
• The client has a balance sheet total of more than £5.1 million
• The client has more than 50 employees

It is important to note that IR35 rules apply to a group of companies as a whole, not individual companies within the group.

Contractors who believe they may be affected by IR35 rules can take out insurance to protect themselves from the risk of additional tax and national insurance contributions. Limited companies engaging with private sector clients may want to consider obtaining insurance coverage that includes IR35 insurance to mitigate the impact of the legislation.

The determination of IR35 status and the application of off-payroll working rules is a complex process, and businesses may want to seek professional guidance to ensure compliance with the legislation.

Small Companies Exemption and the April 2021 Changes

For a business to qualify for the small companies’ exemption, it must meet certain conditions. A company is considered as a small company if it meets two or more of the following:

• The annual turnover does not exceed £10.2 million
• The balance sheet total does not exceed £5.1 million
• The company has 50 employees or less

It’s important to note that even if a company qualifies as small, it must assess whether IR35 legislation applies if they engage with contractors.

The recent changes in the new off-payroll working legislation, which came into effect in April 2021, mean that clients are now responsible for determining the IR35 status of services provided by contractors to a small company. If a business engages with a contractor and is considered a small company, the rules for off-payroll working will apply from the start of the tax year.

Under the new IR35 legislation, the determination statement must be provided to the contractor’s company and the end client, as well as the agency where applicable. This statement outlines whether or not the IR35 rules apply to the engagement and the reasons behind this determination.

It’s important for businesses to assess their situation and determine if IR35 legislation applies. If a company meets the small business test conditions, they may qualify for the small business exemption which applies until the tax year following the filing of the accounts. Businesses may also right to request that the decision be reconsidered by the client if they disagree with the IR35 status determination.

It’s essential for businesses to understand the off-payroll working rules and determine whether IR35 applies to their engagement with contractors. Failure to do so may result in additional tax and potential penalties in the future.