Changes from April 25 to small business exemption

It has been confirmed by HMRC that the changes from 6 April 2025 to the company size thresholds as set out in the Companies Act 2006 will also apply for the purposes of the off-payroll IR35 working rules.

Under the off payroll working rules an end client which uses the services of a contractor working through their own intermediary (such as a personal service company) must decide the employment status of the contractor.  This is the case even if the contractor is engaged further down the contractual chain, for example via an agency.

The off payroll working rules apply to businesses that are in the public sector or are private sector businesses that fall within the definition of medium or large as laid down in the Companies Act 2006. Private sector businesses that are classed as small do not have to consider the off payroll working rules, the responsibility to determine if the IR35 legislation applies sits with the contractor’s personal service company.

From 6 April 2025 the thresholds in the Companies Act are increasing, and a company will be considered small if it satisfies two of the three following conditions for two consecutive financial years:

• Turnover of not more than £15m (increased from £10.2m)
• Balance sheet total of not more than £7.5m (increased from £5.1m), and
• Monthly average number of employees not more than 50 (no change)

Going forward the implications are that businesses which were previously classed as ‘medium’ could now meet the ‘small’ criteria and as a result will no longer be responsible for determining whether the off payroll working rules apply. In these circumstances the responsibility to determine the IR35 legislation position will shift back to the contractor’s personal service company.

For the purposes of the off payroll working rules, a private sector company’s size is determined by reference to two consecutive financial years; the latest financial year where the filing date for the accounts ends before the beginning of the tax year and the financial year before that one.

Therefore, the changes to be implemented to the threshold sizes will not impact the off payroll working considerations until 6 April 2026 at the earliest. It is expected that HMRC will be updating their employment status guidance in due course to reflect these changes.

If you would like to discuss the potential impact of these changes on your business or, any other concerns you may have with the off-payroll legislation please do not hesitate in contacting The Guild. Ask to speak to one of our employment taxes experts who will be happy to provide you with support and advice where possible.