ESM10008 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: meaning of medium or large-sized: connected persons

Sections 60A; 60B; 60C; 60D; 60E: 60F of Chapter 8, Part 2 ITEPA 2003

Regulation 5A Social Security Contributions (Intermediaries) Regulations 2000

Where a person is connected to another person, to determine their turnover for that limb of the size test, they must determine their size by adding their turnover to the turnover of all persons they are connected to. For corporate entities, where their turnover exceeds £10.2 million and the other relevant limbs of the size test are met (ESM10006) they will be considered medium or large-sized for the purposes of the off-payroll working legislation. For non-corporate entities, if aggregated turnover alone exceeds £10.2 million, they will be considered medium or large-sized for the purposes of the off-payroll working legislation.

To determine its turnover, a corporate entity (companies, limited liability partnerships, overseas companies and unregistered companies) must look at the last financial year before the tax year concerned for which the period for filing its accounts and returns has ended to determine its turnover. For example, an entity has a financial year ending 31 March. For the 2021/22 tax year, the entity would look at the financial year ending 31 March 2020 with a filing date of 31 December 2020.

For those non-corporate entities with a financial year (known as ‘other undertakings’ in the legislation, such as partnerships), the relevant financial year for determining their turnover is the one ending at least nine months before the beginning of the tax year concerned. For example, a non-corporate entity has a financial year ending 30 June. Nine months prior to the commencement of the 2021/22 tax year is 5 July 2020. As the entity’s financial year ended prior to this date it can use the period 1 July 2019 to 30 June 2020 when considering the connected persons rules.

Non-corporate entities without a financial year (known as ‘other persons’ in the legislation (see ESM10006) - such as individuals performing a trade) will determine their turnover by reference to the calendar year ending before the tax year concerned.

Where a corporate entity (companies, limited liability partnerships, overseas companies and unregistered companies) is a member of a group, it does not need to consider the connected persons rules. Instead they will determine their size by reference to the rules in ESM10007.

A person will determine whether they are connected to another person by reference to the rules in section 993 Income Tax Act 2007 (see PTM027000).

For franchises, depending upon the structure of the business you may need to consider the connected persons rules.

EXAMPLE

Sylvia is a partner in Consultancy Partnership. Sylvia is married to Leonardo who runs his own business as a sole trader. Under the rules a partner in a partnership and their spouse are connected persons, so Sylvia and Leonardo are connected persons.

For the tax year 2021/22, Sylvia must use the partnership turnover for the financial year ending at least nine months before the start of tax year 2021/22. The partnership has a financial year ending 30 June so will use the turnover from the financial year ended 30 June 2020. Leonardo must use the turnover of the calendar year ending before the 2021/22 tax year, this would be 31 December 2020. Sylvia and Leonardo would add these turnover figures together to see whether the turnover is over £10.2 million or not. If combined turnover is above £10.2 million then Chapter 10, Part 2 ITEPA 2003 can apply and should be considered if a worker provides their services through an intermediary.

When small companies are acquired

When all or part of a small company is acquired, that company may no longer qualify as small for the purposes of Chapter 10, Part 2 ITEPA 2003.

When determining if a company qualifies as small for the purposes of Chapter 10, Part 2 ITEPA 2003 for a tax year, the financial year relevant to the tax year concerned is considered. This is a financial year where the period for filing ends before the tax year concerned (see ESM1006 for more detail). Once size is determined for the purposes of Chapter 10, Part 2 ITEPA 2003 for a tax year, that size applies for the whole of the tax year concerned and is then reconsidered each year. Therefore, where an acquisition has occurred, it will not affect size for Chapter 10, Part 2 ITEPA 2003 purposes for the current tax year but could affect subsequent tax years.

If all or part of a company is acquired and that company becomes part of a group for Companies Act 2006 purposes, then for Chapter 10, Part 2 ITEPA 2003 purposes it should follow the guidance at ESM10007.

If all or part of a company is acquired and that company does not become part of the group for Companies Act 2006 purposes, the companies could still be connected. The rules on this page should be considered when determining size for a tax year under Chapter 10, Part 2 ITEPA 2003.

Wholly overseas clients

A client who has no UK connection immediately before the beginning of the tax year because it is not UK resident and does not have a permanent establishment in the UK does not need to consider Chapter 10, Part 2 ITEPA 2003 and therefore does not need to consider its size under these rules. In this scenario, as the engagement does not fall within scope of Chapter 10, Part 2 ITEPA 2003, the worker’s intermediary must consider whether Chapter 8, Part 2 ITEPA 2003 applies

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.