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 the recent 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?

In its summary of responses to the consultation document, the Government has stated that it intends to use ‘similar criteria’ as found in the Companies Act 2006 to define a small business. The Act says that a company will be regarded as small if it has two or more of the following features.

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

It is important to note that at this stage we have not seen any draft legislation and we will need to wait until the new year to see how closely the proposed ‘similar criteria’ is to the above definition.

Modifications for the private sector regime

It is also interesting to note that in the summary of responses, the Government has stated that it intends 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 is 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 said that it will explore options for the consequences of businesses failing 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. 

A further consultation on the detailed operation of the new rules will be published in the coming months and we will await this detail with interest.

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

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