Insights overview

Think you qualify as a “small company” for the new off payroll working rules? Beware!

The off payroll working rules seek to combat tax abuse through disguised employment. They already apply in the public sector, but will be extended to… Read more

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The off payroll working rules seek to combat tax abuse through disguised employment. They already apply in the public sector, but will be extended to the private sector from April 2020.

From April 2020, where a company engages a contractor through a personal service company (PSC) and there would otherwise be an employment relationship between the company and the individual, it is the company’s responsibility to deduct tax and NICs through PAYE, and to pay employer’s NICs.

We talk about the changes in more depth here.

Small companies’ exemption

There is some good news for “small companies”, who do not need to comply with the changes to the rules.

“Small company” has a similar definition to that found in the Companies Act 2006, as companies must meet two or more of the following criteria:

Annual turnover of no more than £10.2 million;
Balance sheet total of no more than £5.1 million;
No more than 50 employees.

If a small company meets the requirements of the exemption under the rules, responsibility for paying tax and NI will remain with the PSC.

Small companies exemption – caution

However, the small companies’ exemption should be treated with caution where the company is part of a larger group, especially where the rest of the group is overseas, as the off-payroll rules contain a further “carve out” to the exemption which is not included in the Companies Act 2006.

Even if a company does meet the criteria above, it will not qualify for the exemption if it has a parent company which does not qualify as small under the definition above.

This will apply to direct and ultimate parent companies, and includes parent entities incorporated outside of the UK. The “carve out” is designed to avoid companies from setting up subsidiaries to get around the rules.

As a result, there may be circumstances where a company qualifies as a “small company” under the Companies Act 2006, but is not a “small company” for the purposes of the off payroll working rules. If you would like further assistance with this, please contact one of the team.

HMRC v BBC presenters

BBC presenters David Eades, Tim Willcox and Joanna Gosling (who were all engaged by the BBC via personal service companies) lost a tax tribunal case last week, after they were all deemed to be “employed” and within IR35.

HMRC was seeking £920,000 in back taxes, in “an exhaustive battle lasting eight years”, although it will be unable to recover this amount in full.

The ruling is expected to have a far-reaching impact for the BBC, which engages approximately 100 of its presenters through PSCs. Commenters have expressed concerns that these individuals will face large bills for taxes despite judges finding that they were in effect, “forced” to work via personal service companies by the BBC. Two of the three judges took opposing views and the case was decided by the casting vote of the third judge, which demonstrates how difficult it is to make status determinations. The key factors in the case were the mutuality of obligation between the BBC and the presenters and the level of control the BBC had over them.

The presenters, who had taken legal advice on the arrangement, were not judged as being careless. This meant that HMRC could only reclaim four years’ back taxes and not six.

This serves as a warning to private companies who continue to engage PSCs from April 2020, to ensure the off-payroll rules are applied correctly, and care is taken with status determination, to avoid lengthy and costly tax litigation.