Are small companies exempt from IR35?

Under the new rules, small companies are exempt from IR35. When working for a small client, the original rules still apply, and the worker is responsible for assessing their status and the resultant tax liability.

A client is a small company based on application criteria in the Company Act 2006. The company remains small if it meets two of the following criteria:

• having fewer than 50 employees
• a turnover less than £10.2 million
• a balance sheet total not exceeding £5.1 million

A small company has no statutory obligation to conduct status determinations and is not liable for taxes if the engagement is considered deemed employment. If a company meets these criteria, the off-payroll legislation does not need to be operated by them. The responsibility for assessment and taxes remains with contractors under the original legislation.

However, it would be prudent for any small company planning on expanding or perhaps being sold later to a large firm to consider the off-payroll legislation if they engage contractors central to their operating model.