What is a small business for IR35?
With all of the discussion surrounding the implementation of new IR35 rules back in April, one thing that didn’t get mentioned as much as it probably should have done: that the rules only apply if your client is a medium or large business. If your client is a small business, the new rules do not apply. But what does this mean in practical terms?
Well, if your client is a medium or large business, the responsibility for determining your IR35 status now sits with your end client, while the tax liability sits with the fee-payer (whether that’s your client or a recruiter). If, however, your client is a small business, you as the contractor still hold the responsibility for determining and declaring your own IR35 status, as well as all of the tax liability – so, in effect, nothing changes from pre-April 2021.
What does HMRC deem a small business for IR35?
The qualifications for what constitutes a small company for HMRC are fairly straightforward. To be considered a small business, the company must satisfy at least two of the following stipulations:
- An annual turnover of not more than £10.2 million;
- Not more than £5.1 million on their balance sheet;
- Not more than an average of 50 employees during the tax year.
It’s also worth noting that if your client’s organisation belongs to a group of companies and is, by definition, a small business, the parent organisation must also be small for the categorisation to stand.
You should also remember that assuming you have multiple clients, you could be determining your own IR35 status for one engagement, but leaving it in the hands of your medium or large end client for another.
How can contractors check their IR35 status?
If your client is, in fact, a small business, then it’s down to you as the contractor to determine whether or not your engagement is inside or outside of IR35. As you also hold the tax liability in this situation, you also want to make sure you get it right, or else you could be the recipient of a rather large tax bill further down the line.
But how to determine whether you’re inside or outside IR35 on any given engagement. The first place to look should be the three main status tests. These are:
- Personal service: Are you able to send a substitute to carry out the work instead of you without requiring any permission from your client? If you have an unfettered right to do this then you could argue that this demonstrates you are outside IR35.
- Mutuality of Obligation (MOO): This is a somewhat controversial status test as HMRC have chosen to ignore it when it comes to their own CEST tool. However, it has been instrumental in caselaw. It ultimately looks at whether or not there are obligations in place for the client to offer work and the contractor to accept it. If both parties have these obligations, then it could be argued that IR35 does apply.
- Control: This test looks at how much control the client has over the contractor’s work. While employers have a significant amount of control over their employees (being able to instruct them in what they work on, when and how), this should not exist in a client-contractor relationship.
As well as these, there are also minor status tests that look at whether you are actually in business on your own account. These include aspects such as whether or not you take on financial risk, such as whether you have business insurance, and whether you provide your own equipment among other details. These tests all paint a picture of your contract with your client as to whether you’re genuinely self-employed or a disguised employee.
The Kingsbridge IR35 Status Tool
Carrying out all of these tests on your contracts and working practices can be exhausting, especially if some of your answers are ambiguous or borderline. It can also be worrying, wondering if you’ve definitely made the right determination. Thankfully, help is at hand with the award-winning Kingsbridge IR35 Status Tool.
For just £50 plus VAT, you get an accurate inside or outside IR35 status determination to give you confidence and peace of mind.
The tool asks between 29 and 34 carefully crafted questions requiring yes or no answers. The questions are developed by Kingsbridge’s Head of Tax, Andy Vessey – a leading IR35 specialist who has defended more than 500 IR35 investigations and has won most of them. They are designed to build a three-dimensional picture of your contract and working practices to give you an accurate determination. If your case is clear-cut, you’ll receive an instant inside or outside determination, as well as a full report outlining the strengths and weaknesses of your case. If, however, your case is borderline, it’s referred to one of our in-house IR35 specialists for a manual review before delivering your determination. Either way, you can have confidence that the status you are claiming for your engagement is an accurate representation.
To access the tool and begin your status assessment, simply visit the website today and follow the simple instructions.