IR35 - IMPLICATIONS FOR SMALL BUSINESSES
On 6 April 2021 the new tax rules for off-payroll workers in the private sector came into effect. For many businesses this resulted in a mad rush to review their contractor arrangements to make sure they were compliant and not carrying potential tax liabilities for the business. Many longstanding contractor arrangements were terminated, some were forced to move in-house as employees and others had to find alternative means to earn a living.
According to research by trade body IPSE (the Association of Independent Professionals and the Self-Employed), in the first 6 months after the iR35 reforms came into effect a staggering 35% of contractors had left the contractor market, as conditions are no longer favourable to operate on a self-employed basis.
However, IPSE have concluded that this impact need not have been so significant had the government guidance and comms on the regulatory changes been managed better and made clearer for businesses.
One major feature of the iR35 reform that was not well communicated in the run up to implementation is the ‘small companies’ exemption’, which provides that the responsibility for applying iR35 rules remains with the intermediary rather than transferring to the business, if certain criteria are met.
So, what is the small companies exemption and does it apply to your business?
For iR35 purposes, the definition of what is a ‘small business’ is taken from the wording of the Companies Act 2006. A business will be classed as small if it meets two or more of the following requirements:
its annual turnover does not exceed £10.2m;
its balance sheet total does not exceed £5.1m; and
it has no more than 50 employees for the financial year.
So long as your business meets at least two of these requirements for any given tax year, the small companies’ exemption applies and the responsibility for applying iR35 rules stays with the intermediary – effectively, the status quo of pre-April 2021.
It is estimated that thousands of contractor arrangements were unnecessarily terminated by small businesses as they sought to minimise the perceived risk of using self-employed labour. IPSE research indicates that across the whole self-employed sector a similar knee jerk approach was commonplace with 21% of end clients applying a blanket assessment that all contractor engagements were inside iR35, and 11% of businesses deciding to stop working with contractors altogether.
With hindsight it is clear that the iR35 reforms were not fully understood by the business community at large, and subsequently many small businesses have lost the advantages of flexibility and productivity that the contractor market can offer.
If your business is looking to use contractors to support your operations and help you grow, don’t panic… take the time to do a proper iR35 assessment and you may find there is nothing to worry about.
For further advice on contractor arrangements in your business get in touch to arrange a call.