If your business engages contractors through personal service companies, changes to the Companies Act 2006 size thresholds could change who’s responsible for IR35 compliance. The changes technically took effect on 6 April 2025, but their impact on the off-payroll working (OPW) rules is only just starting to filter through.
Why company size matters for IR35
Under the off-payroll working rules, it’s the client’s size, not the contractor’s, that decides who’s responsible for working out whether an engagement falls inside or outside IR35. Medium and large businesses must assess a contractor’s employment status and issue a Status Determination Statement (SDS). Small companies are exempt, so responsibility reverts to the contractor’s own limited company.
From 6 April 2025, the financial thresholds used to define a “small company” under the Companies Act 2006 increased significantly:
- Turnover: up from £10.2 million to £15 million
- Balance sheet total: up from £5.1 million to £7.5 million
- Employee numbers: unchanged at 50
A company only needs to meet two of these three criteria to qualify as small. With the financial thresholds rising by roughly 50%, it’s estimated that around 14,000 currently medium sized businesses will eventually be reclassified as small, taking them outside the scope of IR35 determination duties altogether.
Don’t expect automatic change
The threshold increase doesn’t mean instant exemption. HMRC guidance confirms that company size for IR35 purposes is based on the most recent financial year for which accounts were due to be filed, and a company has to qualify as small for two consecutive financial years before the exemption applies. That means the earliest a medium sized company can actually benefit is the 2027/28 tax year, and for many it will be later still, depending on their year end.
The PAYE offset mechanism
Since 6 April 2024, HMRC has been able to offset tax and National Insurance already paid by a contractor’s personal service company when calculating an end client’s liability for IR35 errors. Before this, HMRC could pursue the full PAYE and NI bill from the client without accounting for tax the contractor had already paid, which risked the same income being taxed twice.
What businesses should do now
- Monitor your figures annually. Track your turnover, balance sheet total and average employee numbers against the new thresholds each financial year-end.
- Check your supply chain. Even if your own business isn’t reclassified, key suppliers or subcontractors might be, which changes who’s responsible for status decisions within your contractor network.
- Don’t confuse “small” with “risk-free.” New joint and several liability rules for umbrella company arrangements apply regardless of company size, so exemption from IR35 determination doesn’t remove all workforce tax exposure.
- Get your documentation right. If and when your business does qualify as small, you’ll need to formally notify contractors and withdraw any existing SDS. Get this step wrong and your obligations will continue regardless.
How we can help
Working out exactly when, or if, these changes affect your business depends on your specific financial year end and historical accounts. We can review your position, model when reclassification might apply, and make sure your contractor arrangements and documentation stay compliant in the meantime.
Get in touch with our team to discuss.
