ESM10006 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: meaning of medium or large sized non-public sector organisation and wholly overseas clients
Sections 60A; 60B; 60C; 60D; 60E: 60F of Chapter 8, Part 2 ITEPA 2003
Regulation 5A Social Security Contributions (Intermediaries) Regulations 2000
A client must consider the off-payroll working legislation where it is either a public authority (ESM10005) or a medium or large-sized non-public sector organisation (this includes voluntary sector organisations such as charities). Small non-public sector organisations do not need to consider the rules. Agencies within the contractual chain do not need to consider criteria around size, this only applies to clients. Therefore, agencies of any size can be affected by the rules. An entity’s size, based on the rules below, applies for the duration of a tax year for the purposes of Chapter 10, Part 2 ITEPA 2003.
Corporate entities (companies; limited liability partnerships; overseas companies and unregistered companies):
Limited liability partnerships, overseas companies and unregistered companies are classed as ‘relevant undertakings’ in the legislation. The rules for corporate entities apply equally to entities classed as relevant undertakings.
Qualifying criteria for the Small Companies Regime can be found from section 382 Companies Act 2006 onwards. A corporate entity will be medium or large-sized if it meets at least two of the following criteria for two consecutive financial years:
- turnover of more than £10.2 million
- a balance sheet total (assets) of more than £5.1 million
- an average of more than 50 employees
Similarly, a corporate entity will cease to be medium or large-sized if it no longer meets at least two of the above criteria for two consecutive financial years.
Balance sheet
Balance sheet total means the total amounts shown as assets in the corporate entity’s balance sheet before deducting any liabilities.
Employees
In determining the average number of employees, you should only include persons directly employed by the corporate entity. This would not include deemed employees. To work out average employee numbers:
- for each month in the financial year, find the number of persons employed under contracts of service by the corporate entity in that month – this is whether they were employed throughout the whole month or part of it,
- add together the monthly totals, and
- divide this total by the number of months in the financial year.
Financial year
When considering the qualifying criteria, a corporate entity must look at the last financial year for which the period for filing its accounts and reports ended before the beginning of the tax year concerned to determine whether the tests are met.
For example, let’s consider the position for tax year 2021/22. A private corporate entity’s financial year ends on 31 March 2020. The period for filing ends on 31 December 2020. This period ends prior to 6 April 2021 so the financial year ending 31 March 2020 will be included in considerations regarding size.
New corporate entities
A corporate entity will qualify as small in its first financial year following incorporation for the purposes of Chapter 10, Part 2 ITEPA 2003, even if it is part of a group. The entity will be small until at least the beginning of the first tax year after the period for filing its accounts for the first financial year has ended.
Following the first financial year, size will be decided in line with the Small Companies Regime in the Companies Act 2006 as explained above. If a company is not small under the Small Companies Regime in its first year then it will not qualify as small for the purposes of Chapter 10, Part 2 ITEPA 2003 in the first tax year, which begins after the period for filing its accounts for the first financial year has ended. If a company is small in its first year, then it would need to be medium or large-sized for two consecutive years before being considered medium or large-sized for the purposes of Chapter 10, Part 2 ITEPA 2003.
EXAMPLES
Example 1
Company A incorporates on 1 April 2021. The company’s financial year ends on 31 March 2022, so the end date for the period for filing its accounts is 31 December 2022. The first tax year starting after this date is 2023/24. For the purposes of Chapter 10, Part 2 ITEPA 2003, any entity would be considered small until at least the beginning of this tax year.
In its first financial year ending 31 March 2022, Company A qualifies as small for the purposes of the Small Companies Regime. As the company was small in its first financial year, in order to be considered medium or large-sized it will need to meet the conditions to be medium or large-sized for two consecutive financial years.
Example 2
Company B, a large-sized company, also incorporates on 1 April 2021. The company’s financial year ends on 31 March 2022, so the end date for the period for filing its accounts is 31 December 2022. The first tax year starting after this date is 2023/24. For the purposes of Chapter 10, Part 2 ITEPA 2003, any entity would be considered small until at least the beginning of this tax year.
In its first financial year ending 31 March 2022, Company B does not qualify as small for the purposes of the Small Companies Regime. As the company was large in its first financial year it will not be considered small for the purposes of Chapter 10, Part 2 ITEPA 2003 in the 2023/24 tax year. In order to be considered small, it would need to meet the conditions to be small for two consecutive financial years.
Companies excluded from the Small Companies Regime
Certain companies are excluded from the Small Companies Regime by section 384 Companies Act 2006, so they would not be considered small for the purposes of Chapter 10, Part 2 ITEPA 2003.
Non-corporate entities
A non-corporate entity only needs to consider one year when determining if the condition is met. The entity should consider its size on an annual basis.
Other undertakings
Other undertakings, like partnerships, will be medium or large-sized if their turnover is more than £10.2 million for the last financial year ending at least nine months prior to the beginning of the tax year. Other undertakings will qualify as small in their first financial year providing it ends less than nine months prior to the beginning of the tax year.
Other persons
Other persons will be medium or large-sized if their turnover is more than £10.2 million for the last calendar year prior to the beginning of the tax year.
‘Other persons’ are those who are not a corporate entity or an ‘other undertaking’ such as individuals performing a trade.
Other considerations
Where a client is part of a group of companies or connected to other entities there are special rules for determining its size (see ESM10007 and ESM10008).
Where a client is part of a joint venture see ESM10009.
Charities do not need to take into account donations when calculating turnover for the purposes of determining their size for the off-payroll working rules.
Wholly overseas clients
A client is considered to be wholly outside the UK for the purposes of Chapter 10, Part 2 ITEPA 2003 if, and only if, immediately before the beginning of the tax year it does not have a UK connection because it is not UK resident and does not have permanent establishment in the UK.
Chapter 10, Part 2 ITEPA 2003 uses the definition of permanent establishment at section 1141 Corporation Tax Act 2010. For the purposes of Chapter 10, the reference to company in the Corporation Tax Act should also be read as a reference to persons that are not companies. A permanent establishment includes a fixed place of business which includes, amongst others, a branch, an office or a factory. A permanent establishment can also be any agent who has, and habitually exercises, authority to do business on behalf of the client. INTM153060 gives some further detail. If a worker provides services to an offshore client through a UK resident intermediary, that UK intermediary is not a permanent establishment of the offshore client for the purposes of Chapter 10, Part 2 ITEPA 2003.
Wholly overseas clients do not need to consider the off-payroll working rules. In this scenario the engagement would not be within the scope of Chapter 10, Part 2 ITEPA 2003. The worker’s intermediary must consider whether Chapter 8, Part 2 ITEPA 2003 applies.