Impact of the small company threshold change on off-payroll rules

The off-payroll working intermediary rules (commonly known as IR35) apply if a worker who provides services to a client through their own intermediary—typically a personal service company (PSC)—would have been considered an employee if they provided their services directly to the client. 

Who has responsibility for operating the off-payroll working rules?

Public sector entities and medium or large-sized businesses are responsible for determining the employment tax status of a worker who provides their services through an intermediary such as a PSC. If they determine that the worker is a disguised employee, the client (or fee payer, if different) is required to operate PAYE and National Insurance Contributions (NICs) on payments to that intermediary. Businesses that are considered to be “small” are exempt from applying the off-payroll working rules. In such cases, it is up to the worker/their intermediary to self-assess their employment tax status for each contract.

Upcoming changes to the small company threshold

Whether a business is regarded as small for these purposes is based on the Companies Act definition, and it has been announced that the thresholds are increasing from April 2025. The changes will also apply to Limited Liability Partnerships (LLPs).

For accounting periods beginning on or after 6 April 2025, a company will be classed as small if it satisfies two of the following criteria:

• Its annual turnover does not exceed £15m.
• Its balance sheet total does not exceed £7.5m.
• It has no more than 50 employees.

Where a company is part of a group, it will only be considered small if its parent company also qualifies as small. 

When determining whether a business is small for the purposes of the off-payroll reporting rules, the following financial periods are considered:

• A corporate entity (ie companies, LLPs, overseas companies and unregistered companies) will cease to be treated as small if it exceeds at least two of the criteria above for two consecutive financial years (with the updated thresholds being considered for both years).
• Where the thresholds are exceeded for two consecutive financial years, the off-payroll/intermediaries legislation will need to be applied from 6 April following the deadline for filing the accounts.
• Other undertakings, such as partnerships, will be considered small if their turnover does not exceed £15m for the last financial year ending at least nine months before the beginning of the tax year.
• For other persons (eg sole traders), there is a simplified test where the business is considered small if its turnover (along with the relevant turnover of any connected persons) in the calendar year before the start of the tax year does not exceed £15m.

Ceasing to be a medium or large-sized business

As a result of the increase in the small company threshold, a number of businesses may find that they no longer need to operate the off-payroll working rules. The new thresholds will likely apply for most corporate entities and other undertakings starting from the 2027/28 tax year onwards.

If a client that has provided a Status Determination Statement (SDS) no longer qualifies as medium or large-sized for the upcoming tax year, it must provide a statement to the worker and deemed employer of that fact and confirm that the SDS is withdrawn from the start of the next tax year.

HMRC has stated that they will issue revised guidance in due course.

For a discussion around the impact of these changes, please contact Ian Jones or David Williams-Richardson.