Off-payroll working – the Small Company Exemption

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The proposed changes to the off-payroll working rules – commonly referred to as IR35 – on 6th April 2021 will apply to all but the smallest companies who engage contractors through their own limited company.

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So, what does “small company” mean?

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The definition of small comes from the small companies regime as defined by Chapter 382 of Companies Act 2006.

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A hiring company qualifies as “small” if after its first completed financial year at least two of the following conditions apply:

 

• Annual turnover – not more than £10.2 million 

• Balance sheet total – not more than £5.1 million

• Number of employees – not more than 50 employees

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Annual turnover refers to the turnover in the company’s financial year. In the event the company’s financial year does not equal a complete year, the maximum turnover threshold of £10.2m should be proportionately adjusted. e.g. if a financial year has been shortened to 9 months, the maximum turnover threshold of £10.2m should be divided by 12 and then multiplied by 9 to become £7.65m.

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The balance sheet total means the aggregate of all amounts shown as assets in the company's balance sheet.  This should not in any way become confused with net assets e.g. assets less liabilities.

The number of employees is the average number of persons employed by the company during the company’s financial year. To arrive at this figure, you would identify the total number of employees for each month of the financial year - whether employed for the whole month or not - and then divide it by the total number of months in the financial year.

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When the hiring company is part of a Group

When a hiring company is part of a group, it will still be considered small if the company at the head of that group is likewise considered small.

 

In this situation the small company test is slightly different in that the group company is classed as small if at least two of the following conditions apply:

 

• Aggregate turnover – not more than £10.2m net (£12.2m gross)

• Aggregate balance sheet total – not more than £5.1m net (£6.2m gross)

• Aggregate number of employees – not more than 50

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The values from each member of the group should be used to arrive at the aggregate figure and the test may consider either the net or gross figure.

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In general terms, “net” means after any set-offs and other adjustments have been made to eliminate group transactions and “gross” means without those set-offs and other adjustments.

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When there is a change in company size

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If the small company test is being measured over the company’s first financial year then the application of the company size threshold test is very straightforward, in that a company will qualify as small if the qualifying conditions are met in that year. However, in subsequent years the rules vary, in that the qualifying conditions must be met for two consecutive years for there to be a change in company size for the purposes of qualifying or failing to qualify for the small company exemption.

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Other considerations

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It should be noted that similar rules apply for unregistered companies, limited liability partnerships and overseas companies. In addition, anti-avoidance rules apply for joint ventures, groups, connected persons and others, in which case the principal condition for meeting the ‘small company exemption’ is that the relevant annual turnover for these entities does not exceed £10.2m.

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When the small company exemption applies to the new off-payroll rules

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Where the small company exemption applies, the existing off-payroll working rules will continue, meaning the responsibility and liability for making the employment status determination and deducting the appropriate taxes and NICs remains with the contractor.

 

….and when it doesn’t

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If the hiring company does not meet the small company exemption, it must apply the new off-payroll working rules from the start of the tax year following the end of the financial year it no longer met the small company exemption.

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What to do next

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For any company that remains unsure about their obligations under the new off-payroll rules from 6th April 2021, the Contractor Co-op have specialists who can help.

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For further information, please contact Chris Mattingly on 020 3468 0009