Off-payroll working – what is the impact of the small companies accounting regime?

This article was originally published on 30 July 2019 and updated on 31 July 2020 when the Government had confirmed the IR35 rule changes will take effect from April 2021. It was updated again on 4 May 2021.

The legislative changes for off-payroll workers in the private sector do not apply to client end users of small companies. For those, the legislation in Chapter 8 of ITEPA 2003 remains applicable. The size of the company (and in the case of a parent company, the size of the group headed by it) in terms of its turnover, balance sheet total and average number of employees determines whether it is classed as a small company.

Ineligible companies

Public companies and certain companies in the financial services industry, together with members of groups containing traded companies, entities with securities traded on a regulated market in the EEA and certain financial services entities are ineligible for the accounting regime for small companies and so are not small companies for the purposes of these tax rules.

Small company qualifying conditions

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

• annual turnover must be not more than £10.2m; 
• balance sheet total must be not more than £5.1m; and/or
• average number of employees must be not more than 50.

Applying the small company accounting regime

As long as it is not otherwise ineligible, a company meeting the qualifying conditions can apply the small company accounting regime from its first financial year. In relation to a year other that its first financial year, where on its balance sheet date (generally the end of the financial year) a company meets or ceases to meet the qualifying conditions, that affects its qualification for the small company accounting regime only if it occurs in two consecutive financial years. This means that a company which is a small company in one financial year but ceases to meet qualifying criteria to be a small company in a later financial year is only removed from the small companies accounting regime if it does not meet the qualifying requirements for two consecutive financial years. 

Likewise, a company not previously meeting the qualifying criteria as a small company for a financial year eg a medium or a large company, which changes to meet the small company qualifying criteria must meet those small company accounting regime qualifying criteria for two consecutive financial years before it is classified or, where appropriate, reclassified as a small company for a financial year.

The new off-payroll working tax legislation covers the interaction between financial years of qualification as a small company and how those relate to tax years.

• A company is always small for its first financial year for the purposes of the off-payroll working rules.
• Dependent on the company’s financial year, it may also be a small company for these tax purposes in a tax year occurring its second financial year. That will be dependent on when the financial year end falls in relation to the tax year commencement.
• Thereafter, a company qualifies as a small company for the tax year which starts next after the Companies Act accounts filing deadline for a financial year in which it qualified as small.

These complex qualification rules will have the effect that careful scrutiny of small company financial year qualification and tax year alignment will be needed.

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. Individual clients who receive services other than for the purposes of a business are not in scope.

End users whose status is changed from medium or large to small company for a tax year must notify the worker and deemed employer(s) before the tax year both of that change and that the deemed status assessment is withdrawn. If they fail to do so, the client end user is treated for that tax year as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment. The chain of liability provisions also applies here.

If you have any questions or concerns about IR35, including on how you can best prepare for change, please contact Charlie Barnes, Susan Ball, David Williams-Richardson or Lee Knight.