From 6 April 2025, the definition of "small company" will change, with the result that, starting from April 2027, more contractors will be outside the scope of the off-payroll working rules and the administrative burden of complying with these rules will be reduced for some staffing companies.
The off-payroll working rules (introduced for the public sector in 2017 and for the private sector in 2021) transferred responsibility for accounting for income tax and National Insurance Contributions (NICs) for 'inside IR35' contractors from their personal service companies to the staffing companies that engage them. However, there is an exemption from the application of the off-payroll working rules if the end user client is a small company. If the end-user client qualifies as a small company, the 'old' IR35 rules apply. Under these older rules, it is the contractor company, not the end-user client, which must assess the contractor's status, and it is the contractor company, not the staffing company, that must account for income tax and NICs if the contractor's status is that of a deemed employee of the end-user client, often referred to as being 'inside IR35'.
Currently, a company qualifies as small if it satisfies two or more of the following requirements for two consecutive financial years of the company:
- no more than £10.2 million turnover;
- balance sheet assets of no more than £5.1 million; and
- an average number of no more than 50 employees.
Soon more companies will qualify as small because, for financial years beginning on or after 6 April 2025, the financial thresholds will increase to:
- no more than £15 million turnover; and
- balance sheet assets of no more than £7.5 million.
Staffing companies which supply personal service company contractors on temporary assignments should, in due course, review their client base and find out whether any end-user clients will qualify as small following the 6 April 2025 changes. If any of them do qualify, this will reduce some of the administrative burden for both the staffing company and the end-user client because the old IR35 rules will apply. However, contracts will have to be reviewed and probably amended. Staffing companies should remember that, where a client is a member of a group of companies, its size is determined by the size of the parent company, which is calculated by aggregating the figures from all the members of the group, including any outside the UK. In addition, certain companies, such as public companies, must comply with the off-payroll working rules regardless of their size.
Under the off-payroll working rules, staffing companies (and contractors) can request confirmation of size from clients. The staffing company should make it clear to the client that it is making the request for it to confirm its size under the off-payroll working rules and to which tax year the request relates. The client must confirm its size within whichever is the later of:
- 45 days from the date of its receipt of the request to confirm its size; and
- 45 days prior to the start of the tax year specified in the request.
There is no rush for staffing companies to review their client base. Although HMRC appears to have intended the changes to take effect from the tax year 2026/2027, under the legislation as currently drafted, the changes to the company size thresholds will not have an impact in relation to the off-payroll working rules for at least two years. The earliest a medium-sized company can qualify as small for the purposes of the off-payroll working rules is the tax year beginning 6 April 2027.