Q: off-payroll legislation - small company exemption – UK subsidiary

[bluethunder99]

Thanks, jamesbrown!

I still don’t have access to Tolley/LexisNexis, so I haven’t yet been able to look through their analysis.

But I found this corroboration in HMRC’s updated Employment Status Manual, relating to how groups are counted for the size computation:

“Figures from all members of the group are included irrespective of whether group members are resident in the UK or not, so the worldwide group is considered. ...

“These group rules also apply to overseas companies, ... who are part of a group.”

ESM10007 - Employment Status Manual - HMRC internal manual - GOV.UK

Something else the OP should bear in mind: the OP can ask the client for their opinion about whether they are "small" and should receive that opinion within 45 days.

At this stage, I don’t think the client is even aware of the off-payroll legislation. I will likely need to do plenty of educating. And I don’t think the legal department (of the parent company) has any in-house expertise in UK employment tax law. So, if I was to ask such a question, most likely they would need to consult a UK-based solicitor to obtain an authoritative answer. Alternatively, they might end up with the wrong answer—which is something I don’t want to happen.

I do have a good relationship with the client. So, my preference is to find out the correct answers to the important questions, and guide them along. I certainly need to do that for my own contract, in order to avoid any unexpected problems.

What I don’t want to happen is for the (overseas) legal department to take it upon themselves to impose some kind of irrational protectionist (safe harbour) policy. I’ve seen that happen at another multinational client, with disastrous IR35-related consequences.

Another related issue is that I have included a tax indemnification clause, in my master contract. This has been quite low risk, under the old IR35 rules. But the new rules create financial exposure. I will need to decide how best to handle this, whether to eliminate (override) this clause completely, or impose additional qualifications and restrictions to the indemnification. My current leaning is toward the latter, as I think I can minimize the risk, owing to my particular circumstances.

[jamesbrown]

Tolley:

Small companies ― who is affected by off payroll working (IR35) in the private sector | Tax Guidance | Tolley

There is some limited analysis elsewhere. This was simply from a web search. Tolley's is far more detailed/definitive. Beware of dates on these links because the analysis may not coincide with the latest iteration of the ITEPA.

OFF-PAYROLL RULES FOR CONTRACTORS WORKING FOR UK SUBSIDIARIES | JSA Group
Off-payroll rules - Tax - BDO
IR35 For Small Companies - Qdos Commercial Services
The New Off-Payroll Working Rules: Do they apply to my business?

Something else the OP should bear in mind: the OP can ask the client for their opinion about whether they are "small" and should receive that opinion within 45 days.

[jamesbrown]

Hold on a mo, JB, I need to understand why we are wrong.

Here is the government advice I was referring to April 2021 changes to off-payroll working for clients - GOV.UK

So what is the relationship between that and your advice?

Edit: thanks bluethunder 99 - duly explained.

This is just a summary. You need to look at the actual legislation, like the OP. However, the hook in your summary is this paragraph:

There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.

Both your post and Eek's post implied that the small company exemption was a simple matter of looking at the CA 2006 definition of a small company and applying it to the client. It isn't that simple. However, don't take my word for it. As I hinted at, there is plenty of legal analysis out there, including in the Tolley tax guide. I will try to find some relevant links, but I think there is little good/detailed analysis out there that is free to access (i.e., that is one level of abstraction above the actual legislation, which contains the definitive detail).

[cojak]

Hold on a mo, JB, I need to understand why we are wrong.

Here is the government advice I was referring to April 2021 changes to off-payroll working for clients - GOV.UK

So what is the relationship between that and your advice?

Edit: thanks bluethunder 99 - duly explained.

[bluethunder99]

Thanks for the info, jamesbrown!
I’ve just requested a 7-day trial for Tolley/LexisNexis, but I’m not sure if I’ll be able to access that, as I’m no longer based in the UK.

cojak & eek: ITEPA § 60C specifically deals with groups of companies. And this overrides the provision in ITEPA § 60A, if the parent/group is not small. Hence the question. (A lot of websites seem to overlook this important fact, which I think will be relevant for many consultants/contractors.)

I note that the “UK connection” test in ITEPA § 48(1)(b) applies to the client company itself, but not to the parent company/group. I don’t know if that was intentional. It certainly will cause difficulties with my client, as the group doesn’t have any UK-based legal expertise.

[jamesbrown]

I think the above posts are wrong. There is a clear definition of a small company according to the CA 2006. However, the rules are also clear that the definition of “small” applies to the aggregate position of a group of companies. This is an anti-avoidance provision that prevents a large company from creating a subsidiary that meets the definition of small. In short, there is a carve-out for small companies that are owned by large companies, including large companies with no U.K. presence. OP, I think you are correct that your small client is large for the purposes of the updated ITEPA. However, there is good legal analysis out there. IIRC, there was a good article in Tolley about the small company exemption, but you’ll need to register.

[eek]

What conclusion? Despite the above you have only given us half the story.

There is a very simple definition as far as I understand it.

A small company is one that has:

1. Fewer than 50 employees
2. A turnover of less than £10.2 million
3. Assets of less than £5.1 million

And that’s it (happy to be corrected by one of our regulars though, but I can’t see any changes from the last time I posted this definition...)

If the client company fits the above definition, it’s small; if it doesn’t, it isn’t.

The parent company is irrelevant.

That is nearly correct the test is not profits its total assets (before liabilities) - HMRC are also very clear that it is only these simply rules they care about.

So the parent company really doesn't count, however, I would go for the simple approach and ask whether they think the role is for a 1 off project or replacing a member of staff.

If the former - keep it outside otherwise inside.

[cojak]

I’ve been trying to get a definitive answer to the following situation:

(a) Client is a UK-incorporated company that is wholly owned by a large multinational, and
(b) Client (i.e., the UK company itself) is “small,” insofar as it qualifies for the “small companies regime,” and
(c) Multinational parent company is very large, but has no UK presence. In other words, parent has no permanent establishment in the UK and no requirement to register with the UK authorities.

Question: Does the 2021 off-payroll small company exemption apply to the client, in the above case?


-- MY ANALYSIS --

I’ve been reading through the twisted legislation to try to figure out the answer. Here is my humble analysis:

1. ITEPA § 60C(1) states that “a company does not qualify as small...” if:
(a) the company is a member of a group…, and
(b) the company is not the parent undertaking of that group..., and
(c) the undertaking that is the parent undertaking of that group...does not qualify as small... .

2. ITEPA § 60C(5) states: “Expressions used in this section [i.e., 60C] and in the Companies Act 2006 have the same meaning in this section as in that Act.” (I assume “expressions” also include “words”)

3. “Company” is defined in CA2006(1) “as a company formed and registered under this Act.” In other words, “company” means a UK-incorporated company. Although there is an alternative definition of “company” in ITEPA § 61(1), this does not override the above definition, as the latter excludes application to sections 60A through 60G (per the 2020 amendment).

4. “group” is defined in CA2006 § 474(1) as “a parent undertaking and its subsidiary undertakings.” The latter terms are defined in CA2006 § 1162 using the term, “undertaking,” which in turn is defined in CA2006 § 1161. This latter term includes “body corporate” but notably does not include “company.”

5. “Body corporate” is defined in CA2006 § 1173, which states that “‘body corporate’ and ‘corporation’ include a body incorporated outside the United Kingdom. But it is unclear from this “definition” whether “body corporate” also includes a body incorporated inside the United Kingdom.

6. If “body corporate” did not include UK-incorporated companies, that would make the usage of the term, “undertaking,” problematic in CA2006, as the term is used widely. So, I will assume that “body corporate” and “undertaking” include both UK and non-UK companies.

7. Per the above definitions, all 3 tests in ITEPA § 60C(1) pass, and therefore the “company” does not qualify as small.

8. Aside: If, on the other hand, the definition of “body corporate” did not include a UK-incorporated company, then a “group” could include a “company”, and therefore the test in ITEPA § 60C(1)(a) would fail. This would imply that a large (non-UK) group does not negate the small company exemption status of a small subsidiary.

9. ITEPA § 60D doesn’t alter the above conclusion, as the “company” does not fall into categories (a), (b), or (c).

10. ITEPA § 60E and 60F don’t seem to alter the above conclusion either.


So, it seems that the answer to the original question is:

No, the small company exemption does not apply, in the above situation.

But the opposite conclusion would result if the “body corporate” definition failed to include UK-incorporated companies. So, everything hinges on that ambiguous definition!

I would note that the “UK connection” test in ITEPA 48(1)(b) applies only to the client, and not to the parent company. This is unfortunate.

----

So, is my analysis and conclusion correct? Or have I made a major mistake? Or do you have an alternative analysis and conclusion?
Let me know and comment.

I think this situation will apply to a lot of consultants and their clients.

What conclusion? Despite the above you have only given us half the story.

There is a very simple definition as far as I understand it.

A small company is one that has:

1. Fewer than 50 employees
2. A turnover of less than £10.2 million
3. A profit of less and £5.1 million

And that’s it (happy to be corrected by one of our regulars though, but I can’t see any changes from the last time I posted this definition...)

If the client company fits the above definition, it’s small; if it doesn’t, it isn’t.

The parent company is irrelevant.

[bluethunder99]

I’ve been trying to get a definitive answer to the following situation:

(a) Client is a UK-incorporated company that is wholly owned by a large multinational, and
(b) Client (i.e., the UK company itself) is “small,” insofar as it qualifies for the “small companies regime,” and
(c) Multinational parent company is very large, but has no UK presence. In other words, parent has no permanent establishment in the UK and no requirement to register with the UK authorities.

Question: Does the 2021 off-payroll small company exemption apply to the client, in the above case?


-- MY ANALYSIS --

I’ve been reading through the twisted legislation to try to figure out the answer. Here is my humble analysis:

1. ITEPA § 60C(1) states that “a company does not qualify as small...” if:
(a) the company is a member of a group…, and
(b) the company is not the parent undertaking of that group..., and
(c) the undertaking that is the parent undertaking of that group...does not qualify as small... .

2. ITEPA § 60C(5) states: “Expressions used in this section [i.e., 60C] and in the Companies Act 2006 have the same meaning in this section as in that Act.” (I assume “expressions” also include “words”)

3. “Company” is defined in CA2006(1) “as a company formed and registered under this Act.” In other words, “company” means a UK-incorporated company. Although there is an alternative definition of “company” in ITEPA § 61(1), this does not override the above definition, as the latter excludes application to sections 60A through 60G (per the 2020 amendment).

4. “group” is defined in CA2006 § 474(1) as “a parent undertaking and its subsidiary undertakings.” The latter terms are defined in CA2006 § 1162 using the term, “undertaking,” which in turn is defined in CA2006 § 1161. This latter term includes “body corporate” but notably does not include “company.”

5. “Body corporate” is defined in CA2006 § 1173, which states that “‘body corporate’ and ‘corporation’ include a body incorporated outside the United Kingdom. But it is unclear from this “definition” whether “body corporate” also includes a body incorporated inside the United Kingdom.

6. If “body corporate” did not include UK-incorporated companies, that would make the usage of the term, “undertaking,” problematic in CA2006, as the term is used widely. So, I will assume that “body corporate” and “undertaking” include both UK and non-UK companies.

7. Per the above definitions, all 3 tests in ITEPA § 60C(1) pass, and therefore the “company” does not qualify as small.

8. Aside: If, on the other hand, the definition of “body corporate” did not include a UK-incorporated company, then a “group” could include a “company”, and therefore the test in ITEPA § 60C(1)(a) would fail. This would imply that a large (non-UK) group does not negate the small company exemption status of a small subsidiary.

9. ITEPA § 60D doesn’t alter the above conclusion, as the “company” does not fall into categories (a), (b), or (c).

10. ITEPA § 60E and 60F don’t seem to alter the above conclusion either.


So, it seems that the answer to the original question is:

No, the small company exemption does not apply, in the above situation.

But the opposite conclusion would result if the “body corporate” definition failed to include UK-incorporated companies. So, everything hinges on that ambiguous definition!

I would note that the “UK connection” test in ITEPA 48(1)(b) applies only to the client, and not to the parent company. This is unfortunate.

----

So, is my analysis and conclusion correct? Or have I made a major mistake? Or do you have an alternative analysis and conclusion?
Let me know and comment.

I think this situation will apply to a lot of consultants and their clients.