Does IR35 apply to small companies? What are the new rules? IR35 changes loom

Budget 2021: Martin Lewis reveals 'clever' tax changes

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IR35 rules at the moment aim to squash the issue of tax avoidance by rules targeted at combatting ‘disguised employment’ in situations where a contractor is providing personal services to a business. Despite being in place since April 2000, IR35 has been heavily criticised by tax experts and businesses as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses. This is why the Government is replacing the legislation this year on April 6. The new IR35 rules have been postponed as they were supposed to come into effect in April 2020, but due to the COVID-19 pandemic were put off for a year.

Does IR35 apply to small companies?

The new IR35 rules only apply to medium or large sized businesses in the private sector and all companies in the public sector.

There is an exemption for clients who are classified as small businesses as defined by the Companies Act 2006.

To qualify as a small business, a company has to meet two or more of these criteria:

  • Annual turnover is no more than £10.2million
  • Balance sheet total is no more than £5.1million
  • No more than 50 employees

Where the client meets two or more of these qualifiers, responsibility for determining IR35 status remains with the contractor, and the new rules won’t apply.

The Government has included clauses within the legislation to make sure medium and large-sized businesses don’t set up subsidiary companies to take advantage of the exception.

The legislation will apply to the parent company based on the amount of turnover and the amount left on the balance sheet total.

However, within the public sector there’s no small business exemption which means the legislation still applies to all clients engaging contractors within the public domain.

What are the new rules?

Right now, if you’re a contracted or freelance worker and your client is in the public sector, it’s their responsibility to decide your employment status.

You should have been formally notified of their decision after careful consideration.

If you’re a worker and your client is in the private sector, it’s the intermediary’s responsibility to decide your own employment status for each contract.

The private sector includes third sector organisations, like some charities.

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But from April 6, 2021, the way the rules are applied will change.

From this date onwards, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.

HMRC has clarified that if a client is based wholly overseas with no actual presence in the UK, then the new rules won’t apply.

As stated above, however, if a worker provided services to a small business in the private sector, the worker’s intermediary is still responsible for deciding the employment status and whether or not the rules apply. 

If the new rules apply to you, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC.

In addition, employer National Insurance contributions and Apprenticeship Levy, if it applies, must also be paid to HMRC.

For tax purposes, employment status is whether the worker is fully employed or classed as self-employed, and is used to determine the right amount of taxes the employee and hiring client have to pay.

An intermediary will normally be the worker’s own personal service company (PSC) but can also be a partnership or an individual.

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