The definition of a small business is set to widen from 6 April 2025. As such, fewer businesses will be responsible for status determinations and tax deductions under IR35 rules.
What is IR35?
Some businesses may engage contractors who carry out their work in much the same way as an employee, save that they supply their services via an intermediary. These intermediaries are commonly limited companies that the contractor owns and controls (often called a personal service company).
The IR35 regime aims to prevent the avoidance or reduction of tax and National Insurance contributions through the use of these intermediaries. Generally if the contractor would have been an employee of the client were it not for the use of the intermediary, then tax and national insurance contributions (similar to those required for an employee) must be made.
We have previously covered this concept of “deemed employment” in another article, which you can read here.
In 2000, the off-payroll working rules were introduced, which stated that if the end-client of the services is a large or medium-sized business they will be responsible for determining the individual’s status and deducting tax accordingly.
It is only where the end-client is a “small business” that these responsibilities will instead fall to the intermediary – often, the contractor’s personal service company.
What is changing?
The thresholds to determine the “size” of a business for IR35 purposes are changing. The size thresholds in the Companies Act 2006 are set to be amended, and HMRC have confirmed that these amendments will also apply in respect of IR35.
From 6 April 2025, a business will be considered a small business for IR35 purposes if at least two of the following criteria are satisfied:
- Turnover of no more than £15 million (currently £10.2 million).
- A balance sheet total of no more than £7.5 million (currently £5.1 million).
- An average of not more than 50 employees across the relevant financial year (no change).
As a result of these changes, more businesses will qualify as small, and therefore will not be required to carry out status determinations or deduct tax in respect of contractors. This should help to relieve the tax and administrative burden of IR35 and the off-payroll rules on many smaller businesses, going some way to offset the implications of the upcoming employer national insurance increases.
It remains the case that appropriate tax and national insurance will still need to be accounted for, even when the end-client is a “small business”, but primary responsibility for this will likely sit with the contractor’s personal service company.
If you are unsure as to whether any of your contractors may fall within the IR35 or off-payroll working rules or have any other questions please do get in touch at [email protected]
