IR35 rules for the private sector are changing in terms of implementation from April 2020. As things stand currently, small companies will be excluded.
The definition of small companies follows that of the Companies Act 2006 which is if a company meets 2 of the following criteria in a 12 month period;
Not more than 50 employees
Turnover not more than £10.2m
Balance sheet not more than £5.1m
This means a contractor providing services to a small company will not be subjected to the change from April 2020 and the responsibility to determine IR35 status will remain with the contractor.
Though this may be good news for some, a great deal of confusion remains with how to implement the criteria to determine who is actually small. For example, the Companies Act allows for a small subsidiary of a large group to be deemed a small company. In theory, this would allow larger companies to create subsidiaries to circumvent the rules. However, it is a certainty HMRC will have anti-avoidance rules in place to counter any possible thoughts.
The problematic of the approach above can be summarised in the bullet points below;
Who decides whether the company is small? The company itself or even HMRC?
When is the decision made? At the outset of the 12 month period or based on the last year’s figures?
A company may meet the criteria to being small one year and not the next – how are the rules to be applied here?
What if the accounts have been prepared incorrectly applying the wrong size criteria?
It appears that a lot of clarifications are still needed around this topic for contractors and end clients too. The sooner everyone gets this the better.