Those familiar with IR35 will know that the rules for determining IR35 status are different for medium/large businesses (‘MLBs’) and small ones, as are the rules as to who is liable to account for IR35 taxes. If the hirer is a small business, the contractor remains responsible for reporting to HMRC where an engagement falls inside IR35, and for accounting for the consequent tax. Not so where the hirer is an MLB, and we all know that the potential of tax liability for MLBs has caused a good number of MLB hirers to take the risk-free route of blocking outside IR35 arrangements one way or another.
The Change
Employment businesses (EBs) tuned into this area may be keen to take note. A small business is now redefined from 6th April 2025. Two of the three criteria for determining a small business will increase: turnover £15m up from £10.2m, balance sheet up from a maximum of £5m to £7.5m; whilst staff maximum level of 50 remains the same.
So EBs supplying contractors can revisit IR35 if the hirer is a small business under the new rules, when it may not have been under the old rules. This does not mean that engagements with that hirer are automatically outside IR35, but that the responsibility for the assessment and liability for the taxes may pass to the contractor. This means that in this case no more risk of having to pay the contractor’s deemed employment income.
Hirer’s obligations
Reviewing the client’s size can be made easier by setting aside a task force to check the clients you work with. This should be helped by the legal requirement for an existing hirer to (a) tell you if its status as MLB has changed to small and (b) withdraw any previous IR35 status assessment. A hirer’s failure to recognise this obligation comes with the risk that it may become liable for the IR35 ‘deemed employment’ taxes as the fee payer in place of the party that actually pays the contractor. So it’s always best to be clear about a new small business status.
Once a business is identified as now falling within the ‘small business’ rules, the old IR35 rules apply, with minimal scope for tax risk for the supplying employment business and all parties are likely to be content.
Nothing is easy in this life but some focus on this area may produce dividends for contractor agencies, and for once recognising that so long as it’s small, bigger is better!
For help with status assessments, training on IR35, or tried and tested IR35-friendly contracts, call Lawspeed on 01273 236236 or email info@lawspeed.com.
Lawspeed – the original recruitment law specialist.
