In our article titled ‘Employed or self-employed? That is the question’, we discussed the proposed changes to the intermediaries legislation (more commonly known as IR35) that are due to be imposed on the private sector from April 2020. In this article we focus on the size of the business that could be affected.
By way of background, whenever a business engages a worker, the worker’s status must be determined for tax purposes – employed or self-employed. Where the worker is an employee, PAYE must be operated and tax and National Insurance must be paid to HMRC accordingly.
Until recently, where the business engaged the worker through an intermediary, typically the worker’s personal limited company, the requirement for determining the worker’s status and, where applicable, the obligation to operate PAYE fell to the intermediary under the IR35 rules. In that situation, the engaging business was not required to operate PAYE, regardless of the worker’s status.
From April 2017, the position changed for public sector bodies, and the responsibility for determining the worker’s status and operating PAYE now lies with the public body regardless of whether the worker is engaged directly or through an intermediary.
At the 2018 Budget, HMRC confirmed they would extend this change to the private sector from April 2020, but not for ‘small’ businesses.
The latest development is HMRC’s announcement as to how they plan to define a small business. The current proposal is that it will follow the Companies Act definition, whereby a company is small if it meets at least two of the following conditions:
- Turnover does not exceed £10.2 million
- Balance sheet total does not exceeds £5.1 million
- Number of employees does not exceed 50
For unincorporated business, where the presentation of the balance sheet does not follow a strict format, HMRC have put forward two options:
- A business is small if turnover does not exceed £10.2 million AND the number of employees does not exceed 50.
- A business is small if turnover does not exceed £10.2 million OR the number of employees does not exceed 50.
There will therefore be a two tier system in the private sector where firms engage workers through intermediaries:
Small businesses – the intermediary is responsible for determining status and operating PAYE.
Non-small businesses – the engaging business is responsible for determining status and operating PAYE.
As a reminder, there is no change where a worker is engaged directly – it is always the firm’s responsibility for determining the worker’s status and operating PAYE where they are an employee.
This proposed change of the rules will present a significant change of tax risk for a large number of firms. The rules will take effect from April 2020 and will apply to all engagements in existence after that date, not just new contracts.
There is therefore limited time for firms to assess whether they will meet the conditions for a small business and, if not, whether they will need to start operating PAYE for workers engaged through intermediaries.
We can help firms to assess their responsibilities and determine whether their engagements will be affected.