The new rules mean that the end user client (being the business to whom a contractor provides their services) is responsible for determining the contractor’s tax status. If the end user client determines that the engagement falls in scope of IR35, payment to the contractor’s company will be taxed at source – as if they were an employee.
However, these rules only apply if the end user client is a medium or large entity and has a UK connection.
A UK Connection
The first thing to establish is what is meant by the UK. Under the Income Tax Act 2007 (s.1013), the United Kingdom means England, Wales, Scotland, and Northern Ireland. The Isle of Man and the Channel Islands are not part of the United Kingdom.
In order to establish whether an organisation has a UK connection, one of the following must apply:
- previous resident in the UK (immediately prior to that tax year), or
- had a permanent establishment in the UK (such as a UK branch)
The requirement that the end client has a UK connection means any end clients that are entirely overseas will be excluded from the off-payroll IR35 regime completely. Instead, it will be for the UK-based intermediary to deduct the correct taxes from payments it makes to the individual contractor under UK law.
On the other hand, companies with a UK connection but who only contract with individuals based entirely abroad won’t be caught by the new rules either. This is because an individual who is not a UK resident has no ordinary liability to pay tax for work performed outside the UK. It is important to consider this on a case-by-case basis as it is not always straight forward. The individual must be deemed a non-UK resident by reference to the Statutory Residence Test and, if not, the IR35 rules may apply.
When is a business classed as a medium or large entity?
Whether an organisation is medium or large is ascertained by establishing if it qualifies as small for the tax year. A corporate entity will be medium or large-sized if it meets at least two of the following criteria for two consecutive financial years:
- turnover of more than £10.2 million
- a balance sheet total (assets) of more than £5.1 million
- an average of more than 50 employees
Similarly, a corporate organisation will no longer be classed as medium or large-sized if it fails to meet least two of the above criteria for two consecutive financial years.
From an off-payroll working rules perspective, this status is determined by your last-filed accounts. For example, for tax year 2022-23, an existing company with a 31 December year end would apply the small companies test to its accounts filed on or before 30 September 2021.
However, a business can be asked at any time if they qualify as “small”, so it is important to keep this under review. Businesses should be prepared to respond, within 45 days, to any request from a worker (or any organisation the business contracts with) for confirmation from the end client as to whether it believes it qualifies as ‘small’. HMRC has published a helpful template for businesses to use when responding to these requests which can be found here.
For international businesses, there may be a misconception that you only need to consider the size of your UK entity. This is not the case. Size is determined by reference to the corporate group’s parent company (whether or not the parent is based in the UK). The size of the parent is calculated using figures from all members of the group, again irrespective of whether group members are resident in the UK – the worldwide group is considered.
We are here to help…
Here at Capital Law, we work with clients around the world from our base in Wales. Our international desks can provide you with access to lawyers who originate from, or are intimately familiar with, the countries they represent. We are also part of Consulegis, an international network of law firms that works in more than 45 countries and 150 cities globally.
For more information about IR35 and the off-payroll working rules, join us on the 21 April for ‘IR35 — two weeks on: Your questions answered’. The online session will be delivered by our experienced employment lawyers, David Sheppard (Senior Associate) and Rebecca Mahon (Solicitor).
The session will be followed by a detailed Q&A session that will allow attendees to ask any questions they might have concerning changes to the rules, troubleshooting any potential issues you may encounter, and talking through FAQs we regularly encounter.
