Contractors, what if your client company transitions from ‘medium’ to ‘small’?

The taxman has just updated his “Appeal an employment intermediary penalty” page with a Welsh translation.

But the far more significant update to IR35 for limited company contractors is already set in stone -- not that it will hit until 2027/28, writes Charlie Hemsworth, director at status specialists Bauer & Cottrell.

April’s “small company” size threshold changes are seminal for IR35

Confusingly, the root of this April 6th 2027 change was actually introduced on April 6th 2025. On that date, two new conditions for “small company” size thresholds took effect.  

But as HMRC explained after the introduction of the two new “small company” conditions (turnover of more than £15million; and balance sheet total of more than £7.5 million), the earliest tax year that contractors’ end-clients will be affected for OPW purposes is 2027/28.

I will come to why this now in-force 2025 change won’t change things for OPW purposes until 2027.

But the key takeaway is that an estimated 14,000 businesses will move from “medium-sized” to “small” under the two new thresholds.

The truth about the 14,000 companies due to transition from ‘medium’ to ‘small’

It might sound large, but in the grand scheme of things, 14,000 firms is not a massive chunk of the business population. And it’s hard to say how many of these 14,000 companies actually engage limited company contractors. It’s even harder to say how many contractors might soon fall back under ‘old IR35’ -- the ‘Chapter 8’ rules.

Nonetheless, this 2027/28 change means fewer businesses having to deal with the burdensome and complicated OPW rules.

Why? Well, it’s simply because “small company” status still results in exemption from the April 6th 2021 framework.

‘What’s not to like?’

The upshot is that many more contractors will regain control over their own IR35 status. So, as one IT contractor put it to me, “What’s not to like?!”

However, as mentioned, this change doesn’t bring instant relief.

Private sector organisations will still need to meet the new small company thresholds for two consecutive financial years before being reclassified as “small” (and therefore exempt) for OPW purposes.

What the taxman says…

In HMRC-speak, the “transitional provision” allows companies to retrospectively apply the new size thresholds to the previous financial year to determine size for a financial year beginning on or after April 6th 2025.

However, as the Revenue says in its ESM, the earliest financial year that the transitional provision could impact is 2027/28, as the first financial year beginning on or after April 6th 2025 will have its accounts filed in early 2027.

So, any businesses that drop below the new thresholds of April 2025 won’t see a change in their OPW responsibilities until at least April 2027.

A potential light at the end of a distant tunnel

It sort of constitutes a potential light at the end of a distant tunnel for some -- assuming the “small company” exemption stays put!

For those transitioning from medium to small when the time comes, preparation will be key.

 And while undoing everything is a lot easier than implementing it all, businesses will need to consider how they handle the transition, particularly when it comes to their contractor workforce. 

The 14,000 soon-to-be OPW-exempt can inform contractors now

While end-user companies must continue complying with OPW rules until at least the end of the 2026/27 tax year, one important step that they can take in the run-up is informing affected contractors that they will soon be working with an OPW-exempt organisation.

The result? They -- the contractors -- will become responsible for their own IR35 status under Chapter 8 ITEPA 2003.

Clear and early communication from transitioning end-users will help contractors prepare, giving them time to assess their position and seek independent IR35 advice if needed.

Inside IR35 at a ‘medium-sized’ company turning ‘small?’

Having a comfortable window for IR35 advice is especially important where a client has previously determined a contractor to be inside IR35 under OPW, as those contractors will need to carefully consider whether anything has materially changed, before making their own determination under Chapter 8.

In policy terms, is this a meaningful step towards fixing IR35/OPW? 

No. This isn’t a policy decision aimed at improving IR35. It’s simply a necessary update because the OPW rules are tied to the now-updated Companies Act’s definition of a “small company.”

The broader challenges of OPW compliance aren't affected

So, while these two new thresholds for “small company” size represent a potentially positive change for those affected, it won’t impact the majority of private sector engagers or contractors.

And it doesn’t address the broader challenges of OPW compliance either.

Moreover, there’s always been speculation that the “small company” exemption from the OPW rules could be scrapped altogether at some point.

Remember, the small company OPW exemption isn’t guaranteed forever

So it’s probably worth those end-users (who are set to transition) keeping their processes on standby, rather than binning them entirely! 

However, HMRC’s acknowledgement in ESM10006A that the new “small company” size thresholds apply to the OPW rules at least suggests that the tax authority recognises that the exemption remains a sensible and necessary part of the legislation. At least for now.

A (further) word of caution for contractors

For contractors who find themselves regaining control of their IR35 status if their client moves from medium to small in April 2027 or beyond, proceed with caution.

If your client previously deemed you inside IR35, it doesn’t automatically mean you’re suddenly outside IR35 now. While it is much more significant than the addition of a Welsh language translation on a .gov IR35 page, technically speaking, all that’s changing in the above scenario is who makes and carries the liability for the determination, not the actual factors that decide IR35 status.

Lastly, beware an IR35 status backflip around 06.04.27

That’s why, above, I say this is a “potentially” positive change. 

On the contrary, it might not be for some contractors. HMRC may well take an interest if your IR35 status suddenly flips just after April 6th 2027, and any contractors feeling uncertain about their status should consider seeking the tailored guidance of an expert.