The IR35 rules have applied to private sector engagements since April 2021 except where the end-client is small. Part of the test to see if you are small considers the turnover of both the end-client and all ‘connected’ persons.
To qualify as 'Small' for the IR35 rules an end-client entity must meet two of the following qualifying conditions:
1. Annual Turnover; not more than £10.2 million.
2. Balance sheet total; not more than £5.1 million.
3. Number of employees; no more than 50.
Where the end-client is a company in a group these tests are to be applied to the group as a whole. The rules do not end there and non-group companies and unincorporated entities such as partnerships and Limited Liability Partnerships (LLPs) must consider all connected parties when considering whether they breach the turnover test.
'Connected' means relatives, spouses and civil partners and their relatives, and commonly controlled companies. By ‘relative’ we mean brother, sister, parent, grandparent, child or grandchild. To check whether an end-client company and another company are under Common control you need to consider the rights of not only the end-client shareholders but also those of their associates. The meaning of associate for these purposes is relatives, spouses and civil partners. Unlike for 'connected' to apply, the relatives of spouses/civil partners do not count. 'Relative' has the same definition as for ‘connected’.
For example, James is the 100% shareholder of X Ltd. His father wholly owns Y Ltd. His father’s sister and her husband jointly own Z Ltd. X Ltd and Y Ltd are commonly controlled and so are connected for the turnover test. Y Ltd and Z Ltd are also commonly controlled. X Ltd and Z Ltd are not as James and his aunt and uncle are not associates.
In light of these rules, the turnover test seems harsh as there is no requirement for the connected businesses to operate in the same field. It is to be hoped that where the connection rules cause businesses to exceed the £10.2 million turnover threshold they then fail the other two tests, though the number of employees may cause problems for some end-clients.
The onus is on the end-client to determine if they are small or not and they have a legal obligation to confirm this to the agency or worker within 45 days. If they get their size wrong they may face being liable for the obligation to deduct Income Tax and National Insurance Contributions (NICs) with associated implications such as interest and penalties although HMRC have agreed to waive penalties until April 2022.
Useful guides on this topic
IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Personal Service Company (PSC) tax
What is a PSC? What are the tax implications for a PSC?
Off-Payroll Working: PSCs & Private Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?
Employment Status: Mutuality Of Obligation
What is mutuality of obligation? What do the courts say?
Employment status & detailed checklist
An employer (including an Employment Agency) must assess any worker's employment status so that they can fulfil their obligations under employment and tax law.
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