Contractors may have to wait for ‘small company’ clients to be free from off payroll burden

Recently enacted changes to company size thresholds mean that many ‘small company’ clients will not see a reprieve from their off-payroll obligations until the 2027/28 tax year at the earliest.

Two of the three thresholds outlined in the Companies Act have increased from April 2025, applying to financial years beginning on or after that date.

What are the new company size criteria?

Under the new criteria, a company is now considered medium-sized if its turnover exceeds £15 million or its balance sheet total is above £7.5 million. The 50-employee threshold remains unchanged.

The rule change is expected to result in around 14,000 businesses being reclassified as ‘small’.

The knock-on effect is that they will no longer be responsible for operating the off-payroll working rules and determining the employment status of their contractors.

This shift means that contractors engaged by small company clients will again be responsible for determining their IR35 status, as before the 2017 and 2021 off-payroll changes came into effect.

Contractors will have to wait at least 19 months for newly ‘small’ clients to be free of off payroll burden

However, while the Companies Act changes are now in force, an update to the government’s Employment Status Manual (ESM10006A) on 8th April 2025 revealed—once again—that the devil really is in the details as far as the contracting industry is concerned.

Incorporating the principles regarding relevant years for OPW purposes, for the usual 12-month financial year, the earliest tax year the transitional provision will impact a client is 2027/28. This is because the earliest possible filing date for an accounting period beginning on or after 6 April 2025 is in January 2027, which would be relevant for the 2027/28 tax year.

Therefore, any change in corporate size will take at least 19 months to be reflected in off-payroll responsibilities.

The ESM provides examples of how the transitional provision applies in practice to two companies.

What should contractors do?

We asked Seb Maley, CEO of IR35 advisory Qdos, what contractors should do if they work for a newly ‘small’ business client.

Frustratingly, for contractors, it’s a case of sitting tight for the time being. While 14,000 or so medium-sized businesses are expected to reclassify as small, it won’t impact whether they are affected by the off-payroll working rules until April 2027 at the very earliest. So, these businesses will need to continue to manage these rules for the foreseeable future.

That being said, in the lead up to April 2027, contractors engaged by these businesses can and should start to consider their IR35 status ahead of them being passed back the responsibility for IR35.