Jessica O'ConnorChanges to IR35 rules coming into effect are set to shift responsibility away from more businesses and onto contractors, as thresholds for what qualifies as a “small” company are increased, analysis from Malt has revealed.
The reforms mean that a larger number of companies will no longer be responsible for determining whether contractors fall inside or outside IR35, placing greater responsibility on freelancers to ensure compliance and price their work accordingly.
IR35 legislation is designed to ensure that contractors working through intermediaries, such as limited companies, pay similar tax and National Insurance (NI) to employees where their working arrangements are comparable.
According to HMRC, more than 130,000 workers have already been moved into deemed employment tax status since reforms were introduced in 2021.
Under the rules, responsibility for determining IR35 status depends on company size.
Smaller companies are exempt, meaning contractors must assess their own status, while medium and large businesses are required to carry out this determination.
The upcoming changes significantly raise the threshold for what is classed as a small company, meaning more organisations will fall outside the requirement to issue Status Determination Statements (SDS), shifting the compliance burden back to contractors.
Vincent Huguet, CEO and co-founder of Malt, said: “Moving the threshold for ‘small’ company size helps to shift responsibility away from hiring managers, meaning they can focus on when and what they want, not necessarily how much.”
The reforms also introduce a PAYE set-off mechanism, allowing HMRC to take into account tax and National Insurance already paid by contractors when calculating liabilities.
“This is an important step towards avoiding double taxation,” Huguet said.
“It removes the risk that a freelancer ultimately ends up paying more tax than necessary and quite rightly takes responsibility for calculating tax already paid by looking at historic records”.
The updated thresholds increase the definition of a small company to those with turnover up to £15m and a balance sheet of up to £7.5m, while retaining the 50-employee limit.
Huguet said the changes would have a significant impact on how responsibility is distributed: “This is set to shift significantly. The new classification of a small company is set to be totally redefined with more onus set to sit with the freelancer, not the company, given the increased benchmark of turnover.”
He added: “For contractors, it’s more important than ever to price correctly. For example, last year employer National Insurance Contributions (NIC) increased from 13.8% to 15%, and the threshold for payment was reduced from £9,100 to £5,000 annually.
“This meant it became instantly more expensive to hire, or to pay contractors sitting within IR35.
“With increasing onus on the contractor to ensure they are set up correctly, they must be cognisant that Employer NIC is deducted from the assignment rate before calculating a contractor’s pay which influences both contractor inside IR35 and contractor outside IR35 negotiations.”
