When the ‘off-payroll’ IR35 rules were extended to the private sector in April 2021, ‘small companies’ were excluded from the legislation. Here we explain how this exemption works and answer some frequently asked questions.
What is the small company exemption?
When the Government confirmed plans to extend the off-payroll rules to private sector firms in October 2018, the Budget documentation contained a notable exclusion for small company clients.
Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.
Although there was initially some confusion over the definition of the term ‘small’, subsequent legislation confirmed that it is based on the same criteria contained in the Companies Act 2006.
The definition of a ‘small’ company changed from April 2025
The definition of company sizes changed for financial years beginning on or after 6 April 2025, as detailed in the Companies Act 2006.
The higher thresholds mean more businesses may qualify as ‘small’ for off-payroll purposes once the relevant timing rules take effect.
A company will normally qualify as small if, for the relevant financial year, it meets two or more of the following criteria (pre-April 2025 in brackets):
- Turnover – not more than £15 million (£10.2 million)
- Balance sheet total – not more than £7.5 million (£5.1 million)
- Number of employees – no more than 50 (no change)
However, the new thresholds do not mean that clients which fall below them immediately move outside Chapter 10. The off-payroll rules use the relevant financial year and accounts filing timetable, so the effect can be delayed.
Read the HMRC guidance here. The Off-Payroll legislation itself is contained in Chapter 10 of ITEPA 2003.
What should I do if my client is a ‘small’ company?
Any contractors engaged by small companies should apply the IR35 rules as they did before the Off-Payroll private sector extension in April 2021.
The contractor’s company remains responsible for determining workers’ employment status, and this responsibility does not pass to clients that meet the definition of a ‘small company’.
This does not mean that the engagement is automatically outside IR35. The contractor’s company must still determine IR35 status under Chapter 8 and account for any deemed employment taxes where required.
If there is any doubt over whether the client qualifies as small, a worker or intermediary can make a written size-status request to the client. The client must respond within 45 days.
Please note that if your client has become a ‘small company’ as a result of the April 2025 criteria change (above), you may have to wait until the off-payroll rules no longer apply.
The size of any recruitment agency or other intermediary in the supply chain does not determine whether the small company exemption applies. It is the client’s size that matters.
What happens if my client is part of a larger group of companies?
Where a hiring company is part of a group, the small company test is applied to the group as a whole rather than to the hiring company in isolation.
This means looking at the group’s combined figures when determining whether the relevant size conditions are met.
Figures from all members of the group are included irrespective of whether group members are resident in the UK or not, so the worldwide group is considered.
As a result, a subsidiary which would appear to be small on its own may still be treated as medium or large for off-payroll purposes if the group as a whole exceeds the relevant limits.
Special rules also apply to connected persons, so a company that appears small on its own may not necessarily qualify as small for off-payroll purposes.
Clearly, this qualification stops larger firms from setting up smaller subsidiaries purely to avoid the IR35 rules.
See ESM10007 for the technical details relating to groups.
What happens if my ‘small’ client no longer meets the definition of ‘small’ in the future?
A company can cease to qualify as small if it exceeds two of the three small-company limits for two consecutive financial years.
Using the current thresholds, this means exceeding at least two of the following:
- Turnover of £15 million
- Balance sheet total of £7.5 million
- More than 50 employees
The timing of any change depends on the relevant financial year and the accounts filing deadline used for off-payroll purposes, rather than simply the date the company first grows beyond a threshold.
What happens if my ‘medium’ business client is now a ‘small’ business?
If your client now fits the April 2025 ‘small business’ criteria, you should be aware that this doesn’t mean they are immediately freed from the burden of operating the Off Payroll (IR35) rules.
This is because a transitional provision is in place.
In simple terms, the new thresholds can be applied to an earlier financial year when determining when a company changes size for off-payroll purposes. However, the normal accounts-filing and relevant-year rules still determine when that change takes effect.
So, the earliest the new thresholds can normally affect a client’s Chapter 10 status is the 2027/28 tax year. Find out more here.
What about clients which are not companies?
The three-part company test above does not apply to every type of client.
For example, partnerships, sole traders and some other organisations are subject to different size rules, which can include a turnover test instead.
If your client is not a company, check the relevant HMRC rules for that type of organisation.
Worried about an IR35 challenge?
HMRC investigations can be expensive and time-consuming. Qdos provides expert defence and financial cover if your status is challenged.