David Williams-Richardson

Written by: David Williams-Richardson

David Williams-Richardson

Partner

Small businesses excluded from IR35 reform for the private sector, but what constitutes small?

The key announcement in last year's Budget from an employment tax perspective was that the Government will extend the public sector off-payroll rules to large- and medium-sized private sector businesses from 6 April 2020. 

This will mean that businesses using the services of workers operating through intermediaries such as personal service companies (PSC) will be required to assess the arrangements. Where they conclude that the so called IR35 rules apply, the organisation that pay the worker's intermediary (which could be the business or a third party such as an agency) will be responsible for accounting for income tax and National Insurance Contributions (NICs) through PAYE, including the additional cost of employer’s NICs.

Exclusion for small businesses

Crucially, having listened to concerns raised during the consultation process, it has been decided that ‘small’ businesses will be excluded from these new rules. Where services are provided to small businesses by workers operating via intermediaries such as PSCs, the intermediary will continue to be required to ‘self-assess’ and account for tax and NICs where it is concluded that the rules do apply. 

The Government has estimated that, as a result of the exception for small businesses, 95 per cent of end users will not need to apply the reform, but what is ‘small’ for this purpose?

To qualify as a small company, a company that is not otherwise ineligible must meet at least two of these three qualifying conditions:

  • turnover of £10.2m or less;
  • £5.1m or less on its balance sheet; or
  • 50 employees or less.

There is an interaction between financial years of qualification as a small company and how those relate to tax years included.

Anti-avoidance rules apply for joint ventures, groups and connected persons. Similar rules apply for LLPs, unregistered companies and overseas companies and others save that the main determinant for inclusion in the small companies’ regime for these entities is the undertaking’s turnover (specifically defined for these purposes) in the financial year being no more than £10.1m.

Modifications for the private sector regime

It is also interesting to note that in the summary of responses, the Government stated that it intended to refine the design of the reform for the private sector to help the end user business make the correct determination of whether or not the rules apply. This was in response to comments that many end users in the public sector have made blanket decisions that all engagements are caught, to minimise their own risk and administrative burden. The Government has introduced legislation covering what happens to businesses that fail to take reasonable care in arriving at their decisions as to whether or not the rules apply. 

What is clear is that large and medium-sized businesses in the private sector should use the time between now and 6 April 2020 wisely, and should not underestimate the amount of work required to prepare for this major change.  

For more information please get in touch with David Williams-Richardson.

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