IR35: More Businesses Exempt As Small Businesses Definition Changes
Could your business fall outside of the IR35 rules this April? Imminent changes to the thresholds could relieve the existing burden on some mid-sized companies that are currently responsible for applying off-payroll rules to individuals.
Companies should note that changes to the definition of small companies under IR35 (introduced in an attempt to prevent tax avoidance) are about to come into effect, with a potential impact for financial years from April 2025 onwards.
Changes introduced in 2023 to off-payroll rules put the responsibility for the determination of IR35 and the tax liability back with the contractor and away from the client. The rules apply to contractor engagements involving mid-large size companies as the end-user client. It does not apply to small companies, but they must still assess if a contractor is effectively an employee.
But what comprises a medium or large company for the purposes of IR35? Currently, medium or large business will meet at least two of these criteria:
· Turnover exceeding £10.2m
· A balance sheet of at least £5.1m
· 50+ employees
The first two thresholds are about to increase: from April 2025, they will increase to:
· Turnover of no more than £15m
· A balance sheet of no more than £7.5m
So, the number of small companies which are exempt from the rules will undoubtedly increase. However, note that a ‘small’ company ceases to be small if it does not meet the small company definition for two consecutive financial years.
What does this mean?
Any company that could fall outside of the definition for medium and large business for the purposes of IR35 should seek expert advice to ensure they are not at risk of an HMRC assessment and tax determination. A premature decision could be costly.
Compliance for all businesses is essential and the impending change offers a timely reminder that all companies should check they are applying IR35 properly and effectively. Always take specialist advice if you have any doubts.
Individual contractors, consultants and freelancers are also reminded of the need to be aware of IR35 and what it could mean for them.
There could yet be further changes as the Labour government continues its evident targeting of small businesses. There is speculation that the small business exemption could be removed completely - we will keep readers updated.
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