Small company and IR35 off-payroll rules: new thresholds to apply

They are lighting up LinkedIn, IR35 forums, and even some contractors themselves. And arguably with good reason, writes Matt Fryer, managing director of Brookson Group.

Why? Well, the starting point is that, on April 6th 2025, significant changes to the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, will increase the two key thresholds of a “small company.”

‘Small Company’ -- two key thresholds to increase

A company will be “small” if it meets at least two of these criteria:

• Annual turnover of not more than £15 million (up from today's £10.2 million)
• Balance sheet total of not more than £7.5 million (up from today's £5.1 million)
• Have no more than 50 employees (this criterion is the same today)

What’s the impact on IR35 and off-payroll working?

This two-fold increase is particularly significant for limited company contractors, and their end-hirers, due to the off-payroll working rules (IR35).

IR35 applies to the public sector, and all medium-sized and large private sector end-hirers. The rules require medium-sized and large-size private sector businesses to determine the IR35 status of each off-payroll engagement -- and produce a Status Determination Statement to share that determination with the supply chain. 

Exemption from the off-payroll working rules for ‘small’ clients

However, and this is crucial -- companies that meet the definition of a “small company” are not responsible for determining the IR35 employment status of the limited company workers they engage.

Where the end-hirer is a “small company,” the responsibility for this status determination, and for paying the right amount of tax, remains with the contractor under the original IR35 regime (of 2000).

Why the IR35 hoo-ha over small company thresholds increases?

Companies that are currently and marginally outside of the definition of a “small company” and therefore have the responsibility to assess IR35 (since April 6th 2021), could no longer have the responsibility if they meet the new criteria for a “small company.”

The government estimates that 14,000 companies will move from medium-sized to small and so will no longer be responsible for assessing and managing IR35. Instead, the responsibility will transition to their limited company contractors (also known as Personal Service Company contractors) for them to manage their own IR35 status and position.

Small company IR35 changes: practical effects

The changes will mean that there will be a new population of limited company contractors who will be required to take on the responsibility of managing IR35.

However, for the purposes of IR35, a company’s size is determined by reference to its previous financial year end and for the duration of a tax year.

Therefore, the company size threshold changes will have no practical impact on off-payroll working until at least April 2026 at the earliest.

Top 3 IR35 tips for limited company contractors facing ‘small company’ changes

Despite the lack of practical impact for workers until April 6th 2026, it would be advisable to plan and start preparing now, in the instance that the changes to what constitutes a small company impact your current and/ or future assignments.

Here are three tips on what limited company workers affected by the off-payroll working implications of the small company thresholds increasing should do:

1. Get clarity

There must be clarity around who is responsible for managing the IR35 rules for each individual assignment.

2. Use clarity to know who does what on IR35 and tax

Use this clarity to determine which party needs to undertake the IR35 status determination and who is responsible for paying the correct amount of tax to HMRC. 

3. Be prepared to IR35 manage -as your end-user did

If you are a contractor working for a company that will be classed as “small” after the threshold changes in April, you will need to be ready to manage your own IR35 obligations the following year.

These are obligations that, until now, your end-hirer might have always taken care of for you.

Making a 45-day request for client size confirmation

To support with the preparation side of things (tip 3, above ), there are provisions that allow a contractor to request from their client (or prospective client) written clarification of the business’ size.  

So if you think your end-hirer could be impacted by the threshold changes, you should make a formal request to ask them to confirm their company size. 

Your request should make it clear to the client that you are making a formal request for it to confirm its size under the off-payroll working rules in Chapters 8 and 10, Part 2 ITEPA 2003. You should also state which tax year the request relates to.

The client’s response should confirm its size for the tax year and be made in accordance with the size criteria within the off-payroll working rules. The client has 45 days from the date of receiving the request to confirm its size.

IR35 size of client request: When do 45 days begin?

The end of the 45 days is the later of:

• the end of the period of 45 days beginning with the date the client receives the request, or

• 45 days prior to the start of the tax year specified in the request. For example, a request made on February 20th 2025 should be responded to by April 6th 2025 (the start of the new tax year).

Answers to the 45-day request will speak volumes in IR35 terms

If the client confirms they are medium-sized or large and so the engagement is within the scope of Chapter 10, Part 2 ITEPA 2003 (the off-payroll working rules), the worker will know they do not have to operate Chapter 8, Part 2 ITEPA 2003. In other words, the contractor will not be responsible for undertaking a status determination and paying the correct amount of tax. 

If the client confirms they are “small,” and so the engagement is not within the scope of Chapter 10, Part 2 ITEPA 2003, the worker will know they must consider Chapter 8, Part 2 ITEPA 2003 (IR35). In this case, the contractor will be responsible for their own IR35 status determination.

What if end-hirers fail to confirm size within 45 days?

If the client does not respond to the request to confirm its size within 45 days of receipt, the requestor can apply to the courts for an injunction (or an order for specific performance in Scotland), requiring the client to provide the information, which will come with consequences if not adhered to.

As a contractor, if your client moves into the “small company” category, you will be responsible for assessing the IR35 status of your contract with that client, and you’ll be responsible for ensuring the correct amount of tax is paid, starting on April 6th 2026. 

Upsides to more clients no longer having a say on contractor  IR35 status...

As alluded to at the outset, the changes to small company thresholds will be seen by some contractors as a welcome development, as there will now be a larger volume of end-hirers to whom contractors can provide their services, where they (the contractor) can correctly apply the IR35 rules, thereby eliminating risks of ‘false employment.’  

This term is used to denote the many end-hirers who are still not complying with the off-payroll rules and make blanket ‘inside IR35’ determinations to save themselves having to IR35-assess every contractor assignment individually.

Where they haven’t engaged in ‘blanketing,’ some other engagers have made (and continue to make) risk-averse IR35 decisions, whereby they simply avoid applying the off-payroll rules by banning limited company contractors from their supply chains.

An offset of a different kind

So these changes to small company thresholds, which will result in more ‘small company’ clients for contractors and therefore more instances where their IR35 status isn’t in an end-hirer’s hands, remove the above unfair practices for a cohort of the UK contractor market. 

The IR35 ball returning to their court for a fair chunk of contractors is to be offset, however, by the IR35 compliance burden becoming theirs and theirs alone, with HMRC invariably interested in how well they manage that new compliance burden.

Engage a specialist

Affected contractors should ensure they take reasonable steps to assess the contract correctly, and seeking professional advice is advisable.