Effective from 6th April 2025 there will be changes introduced to the criteria defining a "small company." These adjustments, outlined in the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, will impact the application of the off-payroll working rules, commonly known as IR35. Understanding these changes is beneficial for both employers and contractors operating within the UK's built environment sectors.

Revised Small Company Thresholds

Under the current definition, a company is classified as small if it meets at least two of the following criteria:

• Annual Turnover: Not more than £10.2 million

• Balance Sheet Total: Not more than £5.1 million

• Number of Employees: Not more than 50

The forthcoming changes will adjust these thresholds as follows:

• Annual Turnover: Increased to not more than £15 million

• Balance Sheet Total: Increased to not more than £7.5 million

• Number of Employees: Remains unchanged at not more than 50

These adjustments mean that companies previously classified as medium-sized may now fall under the small company category. This reclassification has implications for the application of IR35 rules.

Implications for Employers

For medium-sized businesses on the cusp of the current thresholds, the new definitions offer a reprieve from the administrative and financial responsibilities associated with IR35 compliance. Specifically, companies reclassified as small will no longer be required to determine the employment status of contractors for tax purposes or operate PAYE and National Insurance contributions under the IR35 rules. This shift reduces the compliance burden and potential liabilities for these businesses, enabling them to engage contractors with greater flexibility.

Moreover, this change is expected to make contracting more attractive to businesses that were previously deterred by the complexities of IR35 compliance. As a result, companies may find it easier to access a diverse pool of skilled contractors, facilitating project scalability and specialised expertise without the constraints of traditional employment models.

Implications for Contractors

For contractors, the expansion of the small company category is poised to increase the availability of roles outside the scope of IR35. When engaged by a small company, the responsibility for determining employment status shifts back to the contractor's intermediary, typically their personal service company (PSC). This autonomy allows contractors to assess their own tax status, potentially enabling them to operate outside of IR35 and maintain the associated tax efficiencies.

However, with this increased responsibility comes the need for diligent compliance. Contractors must ensure that their working practices and contract terms genuinely reflect self-employment to withstand potential scrutiny from HMRC. Engaging with knowledgeable advisors and maintaining accurate records will be essential in navigating this landscape effectively.

Next Steps

As these changes approach, both employers and contractors will need to assess how the revised definitions will impact their operations and engagements. Businesses should review their company size classification under the new thresholds and adjust their IR35 compliance processes accordingly. Contractors, on the other hand, should prepare to take on greater responsibility for determining their employment status and ensure their contracts and working practices align with their self-employed status.

Navigating the complexities of IR35 and understanding the implications of these regulatory changes can be challenging. Our team of experts is here to provide tailored advice and support to help you adapt to these developments confidently. Contact us today to discuss how we can assist you in ensuring compliance and optimising your engagement strategies in light of the upcoming changes.