A Change To IR35, Albeit A Small One
A welcome change to IR35, albeit a small one.
The IR35 off-payroll rules certainly need to be fully reviewed (the one thing Liz Truss almost got right was scrapping them altogether), however a small change is coming…
In April 2025, changes to the IR35 legislation will come into effect, concerning the 'small company' exemption. These changes refine the criteria as to what a Small Company is, and therefore determining which businesses are exempt from certain IR35 obligations. This will impact both companies and contractors.
Current 'Small Company' Exemption
As of now, the 'small company' exemption under IR35 is defined based on criteria from the Companies Act 2006. A business is classified as 'small' if it meets at least two of the following conditions:
Annual Turnover: Not exceeding £10.2 million.
Balance Sheet Total: Not more than £5.1 million.
Number of Employees: No more than 50.
When a company qualifies as 'small' under these parameters, the responsibility for determining the employment status of contractors remains with the contractor's intermediary (e.g., a personal service company), rather than the client company. This means that the contractor's intermediary is responsible for assessing whether the off-payroll working rules apply and for ensuring the correct tax and National Insurance contributions are made.
Upcoming Changes Effective April 2025
Starting from financial years beginning on or after 6 April 2025, the thresholds defining a 'small company' will be revised as follows:
Annual Turnover: Increased to not more than £15 million.
Balance Sheet Total: Raised to not more than £7.5 million.
Number of Employees: Remains unchanged at no more than 50.
These adjustments mean that more companies will fall under the 'small' classification, thereby exempting them from the obligation to determine the IR35 status of their contractors. Consequently, in such cases, the responsibility for assessing IR35 status and ensuring compliance will continue to rest with the contractor's intermediary (essentially, the contractors themselves).
Implications for Businesses and Contractors
For businesses, especially those nearing the previous thresholds, this change offers potential relief from the administrative duties associated with IR35 compliance. Companies that now qualify as 'small' under the updated criteria will not be required to assess the employment status of their contractors, thereby reducing their compliance burden.
Contractors engaged with companies newly classified as 'small' will retain the responsibility for determining their own IR35 status. This underscores the importance for contractors to have a thorough understanding of IR35 regulations and to ensure accurate self-assessment to remain compliant.
Actions
For Businesses: Review your company's financial metrics to determine if you qualify as a 'small' company under the new thresholds. If so, update your internal processes to reflect that the responsibility for IR35 status determination shifts back to the contractor's intermediary. For Contractors: Stay informed about the size status of your client companies. If engaging with a 'small' company, recognize that the onus is on your intermediary to assess IR35 status. Consider seeking professional advice to navigate these responsibilities effectively.
By understanding and adapting to these changes, both businesses and contractors can ensure compliance with IR35 regulations and maintain smooth operational relationships.
