When is my client exempt from the off-payroll working rules?

Since the IR35 rules were extended to the private sector in 2021, we’ve hosted numerous events with IPSE members and the wider self-employed community on how the rules now operate.

During these sessions, one question frequently came up: “How do I know if my client is subject to the IR35 exemption?”

Similarly, we know from IPSE research in 2023 that 29 per cent of contractors intend to only work on engagements where their client falls within these IR35 exemptions.

With that in mind, we wanted to put together a clear explainer on what constitutes a small or wholly overseas business, so that you can be aware of whether your client falls into these categories or not.

The small business exemption

The small business exemption applies to the end-client business. This is the final party of the supply chain that is the beneficiary of the service provided by the contractor. 

End-clients will be considered a small business – and therefore exempt from the IR35 legislation – if they meet at least two of the following criteria for two consecutive financial years:

• Turnover of no more than £10.2 million
• A balance sheet total (assets) of no more than £5.1 million
• An average of no more than 50 employees

If your end-client falls within the above criteria, the responsibility for determining IR35 status reverts to becoming your responsibility.

The wholly overseas exemption

It’s worth remembering that the off-payroll working rules for private sector engagements only applies to medium and large-sized clients that are based in the UK. Where the end-client is based wholly overseas, the IR35 rules do not apply.

However, determining the term ‘wholly overseas’ is not always as easy as it sounds.

Being wholly overseas means that the client does not have a permanent UK fixed address – for instance, a branch or office. If the client does have a UK office, the client is then subject to use the IR35 rules.

The irony behind the exemptions

The small business exemption is not to be taken for granted – government’s original plans for the off-payroll working rules would have placed requirements on all businesses, regardless of their size.

IPSE lobbied for the small business exemption because, whilst it was plausible to expect larger companies to take the IR35 burden in their stride, smaller firms could not.

But by granting an exemption to small businesses for this reason, government has effectively acknowledged just how complex and inoperable the rules are.

When government acquiesced and decided to save small businesses from the hassle of IR35, we of course supported this – but would it not be better for businesses, contractors, the economy as a whole, if we instead created rules that everybody can follow?

IPSE continues to campaign for the removal of the IR35 rules. In the current political landscape, there is little appetite for this among policy makers but that will not stop us calling for IR35 to be abolished. In the meantime, we also campaign for changes to the way the rules work that would mitigate their impact on contractors and supply chains – the small business exemption is one example.