Company size threshold changes and IR35

Helen Knight examines the implications of the upcoming changes to company size thresholds, effective April 2025, on off-payroll working and IR35 rules.

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Transcript

Hi everyone. This is Helen Knight, tech Senior Manager at Mercia Group, back with another edition of the Mercier Podcast. Now company sized threshold changes have been one of the big recent news stories for accountants and my colleagues, Lee and Danny, discussed the issues for accountants back in December on another episode of the Mercia of Podcasts.

But something which isn't always immediately obvious is the impact these accounting rule changes have on taxation. And so particularly today, what I'm talking about is the impact these changes have on the IR 35 and off payroll working rules. So let's recap the Intermediary's legislation. Often referred to as RR 35 has been around since two, the year 2000.

And the purpose of it was to catch what HRC calls disguised employment. So that's when someone effectively works like an employee, but because they work through an a limited company, they are treated as a contractor and that can, creates kind of quite a big tax saving, particularly in terms of national insurance contributions.

So that's why these IR 35 rules were originally introduced. We then had the off payroll working rules, and these were rolled out to the public sector in 2017, and then part of the private sector from 2021. So one of the key differences between the off payroll working rules and the original IR 35 is the responsibility for determining the status of that individual, as in whether they should be treated as an employee or whether they truly are a contractor.

So under the off payroll working rules, the responsibility for making that determination shifted to the end client. So the businesses that were hiring those individuals, they would have to make an assessment of whether that individual was an employee or not. So that those off payroll working rules apply across the entire public sector.

But what we've effectively got for the private sector, is two sets of rules and which set of rules apply Depends on. You might have guessed that the company's excise thresholds, so the off payroll working, these new rules where the end client determines the status applies to medium and large companies.

If that end client is a small company, then those original IR 35 rules apply. So effectively the contractors, or more specifically their intermediary, so often their personal service company will make the determination of their status. So how does that then fit into the company size threshold changes?

Well, essentially what the threshold changes have done. Is mean that more companies are getting smaller. The turnover threshold for being considered small increased from April, 2025 from 10.2 million pounds to 15 million pounds, and the balance sheet total. Threshold increase from 5.1 million to seven and a half million.

The number of employee threshold has stayed the same just for completeness. Now, from an accounting and repo reporting perspective, these rules are expected to benefit up to hundred 32,000 companies, and it means they'll have to. A lighter touch in terms of their reporting requirements. What it means from an off payroll working perspective is that responsibility for determining employment status is going to shift back from certain end clients to the intermediary company themselves.

So as I mentioned, for many personal service companies, effectively what this means is that the worker has to determine their own status. And this could be a really positive change for some workers, particularly where they feel like they have more control over the situation and their status. But for many, there's going to be some significant concerns about whether they have that technical knowledge to be able to determine their end status.

And this is where getting advice and accountant support is going to be really important in providing support for those employment status determinations. What I would say is that it's really important to note that although the new rules kick in for. From an accounting and reporting perspective from the 6th of April, 2025, or have kicked in, I should say, the impact for the off payroll working rules is delayed.

This is because the off payroll working rules apply from the start of the tax year. After the financial year end, so the new rules on company size are actually unlikely to bring any change to off payroll working procedures until April, 2026 at the earliest, and in most case, April, 2027. Partly because to be considered small, the tests need to be met for two consecutive financial years.

However, it's definitely worth bearing in mind at this moment. We know there are going to be some changes in who has to determine that employment status. We have covered this issue in a client for friendly way in our most recent newsletter, which can be sent out to clients. But if it is a topic where you want to learn a bit more, you more detail about how the rules themselves apply.

We have run a IR 35, the Definitive Guide course back in February. But a recording of that course is available on the websites, so thank you very much for listening. We've got some change coming in. It is going to be delayed, but it always pays to be prepared. Say thank you very much and goodbye.

IR35 and Off-Payroll Working Rules, Accounting Rule Changes 2025, Employment Status Determination, Company Size Thresholds Explained, Taxation and Disguised Employment.