The government’s guidance confirms that the off-payroll rules will apply to private sector companies that meet two or more of the following conditions:
- they have an annual turnover of more than £10.2 million
- they have a balance sheet total* of more than £5.1 million
- they have more than 50 employees
*Balance sheet total means ‘the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.
A company is defined as ‘small’ (as opposed to medium or large-sized) if it meets two or more of the following conditions:
- has an annual turnover of not more than £10.2m;
- has a balance sheet total of not more than £5.1m; and/or
- has not more than 50 employees.
For a small-sized private sector client, the responsibility of deciding the employment status of their workers will remain the responsibility of the worker intermediary (invariably a limited company).
The government’s guidance makes clear that a company must however be able to confirm their ‘small’ size if asked by either the worker or by the individual or company that they contract with. Accordingly, they must confirm that they meet the ‘small’ company exemption within 45 days of receiving such a request.
What about if the end-client is based overseas?
Where both the fee-paying entity and the end-client are based outside the UK (including where an overseas end-client contracts with a UK PSC (personal service company)), the fee-paying entity remains ‘on the hook’ under IR35 unless the company is defined as ‘small’ as set out above.
Further, the IR35 reforms will not apply to end-users who are based ‘wholly overseas’ with no UK presence and they will be excluded.
An end user will be defined as ‘wholly overseas’ if
- immediately prior to the beginning of the relevant tax year it was not resident in the UK; and
- it did not have a permanent establishment in the UK (e.g. a UK branch or office).
Put simply where a contractor has an end client based overseas, which has no UK connection (e.g. a UK branch or office), the new IR35 reforms will not apply. In this instance the contractor would apply the ‘old’ rules.
Conversely, if the end-client based overseas does have a UK connection (e.g. a UK branch or office), the responsibility to determine status and issue a SDS (status determination statement) will rest with the end client. The overseas end-client in this scenario would be liable for the tax and NICs if it failed to meet its obligations under the new IR35 reforms. HMRC would seek to recover such debt via the UK connection.
What if the Contractor is based overseas (i.e. outside the UK) but the client is UK based?
While contractors can request confirmation from the client as to whether the client qualifies as ‘small’, and clients have obligations to inform contractors of changes to size status during the course of an engagement (as discussed above), the same rights and obligations have not been extended to the question of whether a client has a ‘UK connection’.
This could result in contractors being left somewhat in the dark as to whether the client has a UK connection and the off-payroll rules apply to them, or whether the client does not have a UK connection, meaning the off-payroll rules do apply. If the latter therefore it would be for the PSC to determine the status of the contractor and, if appropriate, account for income tax and NICs.
For a UK-resident contractor carrying on duties overseas (outside of the UK) for an end client, the off-payroll rules may not apply, however there are exceptions to this, depending on how long they will be based overseas and whether the client has a UK connection, as set out above. We advise that contractors always refer to the relevant government guidance here in respect of their specific circumstances.
General advice is that a contractor should act in accordance with the tax laws of the country their PSC is registered in, even if their client isn’t based there however, they must always seek specific advice on their own circumstances.
This article does not provide a full statement of the law and you are advised to take specific legal advice before taking any action based on the information contained herein.
We would also stress that due to the changing landscape (IR35) that this article is accurate up to today however we would highlight that the information may change due to the fast-moving government policy on this.
Any IR35 advice should be read alongside the current Government guidance referred to in this article.
By Andy Boyde