Small businesses could cause big problems for unaware PSCs
Contractors operating Personal Service Companies (PSC) are likely well aware of the need to be vigilant when it comes to IR35 (Off-Payroll). This includes staying on top of any IR35 changes or updates to the legislation. Many of the headlines around IR35 in recent times have been because of changes HMRC has made to determining a contractor’s status.
Previously, the contractor determined whether their engagement is inside or outside IR35. But in 2017 for the public sector and in 2021 for the private sector it was decided that in most cases, the end client would become responsible for determining the IR35 status on engagements. We say ‘most cases’, because the size and location of the end client business decides who is responsible for providing an accurate Status Determination Statement (SDS), something that some PSCs may not be aware of.
How does company size affect the determining party?
The majority of contractors work with medium to large sized companies. In this situation, the responsibility sits with the end client. But the end client is exempt from operating the off-payroll rules should they satisfy criteria being a small company.
In a nutshell, if a contractor is working with a small business, then it remains the responsibility of the contractor to determine their employment status.
What constitutes a small business?
A business is defined as a ‘small business’ with regards to IR35 if it meets any of the following criteria:
- A turnover of £10.2 million or less
- £5.1 million or less on its balance sheet
- 50 employees or less
Many contractors will be working with clients that fall into this bracket. But there is a distinct possibility that the contractor themselves may not know that their client is a small business.
Small businesses and contractors
30% of contractors report that their client or clients fall into the small business category. However, 53% of contractors were not told by the end client that they were a small business, or one that was based wholly overseas, or they had to ask in order to find out the client’s business size. It is possible for a contractor to overestimate the size of the business they are conducting work for. A good place to look is Companies House, their records will show you what regime the client has submitted their accounts, so you can see if they are medium or large or small.
With this in mind, it is important that contractors / or the fee-payer ask the right questions about how many employees and what turnover the end client has before they start working with them. Under the Off-Payroll Rules (OPR), end clients have an obligation to respond to business size queries within 45 working days. This can help a contractor/fee-payer get a clear idea of who is responsible for the SDS and act accordingly.
“Contractors should be asking the question; particularly when they are not presented with an SDS, which should alert them to posing the question and, thereby, enabling them to satisfy their IR35 obligations if they discover their end client is ‘small’,” explains Andy Vessey, Head of Tax at Kingsbridge. “We would encourage contractors to exercise their right at the beginning of each contract to get a clear understanding of where the risk sits.”
Taking the necessary steps
With this in mind, there are some helpful things to do as a contractor.
As a starting point, developing a strong line of communication with your end client is vital, as we believe this to be the best way of managing your IR35 risk. A definite step to take is to request business size information at the beginning of the contract with your client. This is something easy to overlook. But with the possibility of being the determining party, it is important to have this information.
Once you are aware of whether the client falls into the small business category or not, you can act accordingly. We also highly recommend getting an IR35 status review by an independent expert. This demonstrates that you have taken due care and diligence in determining whether you are inside or outside IR35. This is a major benefit if HMRC do challenge you further down the line.
Our recommendation is to get a review that takes a hybrid approach to status determination. It should asked varied, comprehensive and relevant questions about the contract and work practices, this is the hallmark of a trustworthy status review. There should also be opportunities to provide contextual notes or have the ability to talk directly to the IR35 specialist, to further explain your circumstances in order to provide an accurate SDS document.
Any IR35 status review should provide you with a detailed report which outlines whether you are inside or outside IR35. Having an additional contract review will also show the strengths and weaknesses of a given contract. This can help you amend any potential issues in wording or arrangement.
Another important consideration that we highly recommend is to insure your IR35 risk. HMRC investigations can be costly affairs. Insuring against the risk not only helps bring you peace of mind but can also add to your outside-IR35 defence if an enquiry is launched by HMRC.
Our recent survey found that 70% of end clients and 87% of recruiters reported that they had insured their tax, interest, legal costs and penalties risk liabilities should HMRC investigate their business under the Off-Payroll IR35 Rules.
Take the right steps with Kingsbridge
As an experienced contractor insurance provider and industry expert, Kingsbridge is in the perfect position to support contractors in taking the right steps when it comes to IR35.
Our complete IR35 cover and status reviews help to protect contractors and ensure they have a clear status as determined by an industry leader, as well as insurance against any possible investigation from HMRC.
Our IR35 Tool is an award-winning, complete online compliance solution that manages a PSC’s IR35 status determination process. Using leading technology and in-house expertise, the Kingsbridge Status Tool is an independent alternative to HMRC’s CEST tool. This provides PSCs with a clear understanding of their status and offers peace of mind.
Be sure to contact Kingsbridge today and talk with our team to discuss your requirements and secure a quote.