HMRC has announced its latest changes to the company size thresholds will factor in the off payroll working rules.
The new changes will take effect from 6 April 2026 and mean that more end-client companies will qualify as “small”.
Being classified as a small company in this instance means the end-client company will fall outside of the scope of the IR35 Off-Payroll Working (OPW).
What updates have been announced
Under the new criteria, from April 2026, the turnover threshold for a small company will increase to £15 million, up from the current threshold figure of £10.2 million.
Also increasing is the balance sheet total for small company classification. From April 2026, the balance sheet total will increase from £5.1 million to £7.5 million.
However, the employee threshold remains unchanged under the new criteria, remaining at an average of 50.
Should any company meet at least two of the stated criteria when the updated figures take effect, they will be classified as a small company.
HMRC believes the updated criteria offers a better reflection of the current UK climate, factoring in the uncertainty around inflation and business growth.
The updated thresholds are believed to better reflect inflation and business growth. The new criteria are likely to impact around 14,000 companies who are likely to be reclassified as a small business as opposed to medium-sized.
What does it mean for companies to be IR35-exempt?
Companies that need to comply with IR35 rules must apply the OPW rules when speaking with contractors operating within their own limited company, but becoming exempt due to the changes to the small business threshold means the OPW rules will not apply.
If your company does become exempt, it means you are not obliged to make decisions on the contractor’s IR35 status or make tax deductions at source.
These responsibilities would fall under the remit of the contractor’s company, who would then need to decide if IR35 applies in this situation.
The best approach to preparing for the upcoming criteria changes
The best approach is to communicate the size of a company to any agencies or contractors you are intending to work with so they can prepare and fulfil their IR35 responsibilities.
Communicating early means the correct IR35 procedures can be followed, avoids disputes on who is responsible for deductions and liabilities, ensures consistency and reduces the chances of HMRC challenging in the future.
Failing to implement the correct procedures or provide the necessary information can have serious consequences, which can lead to substantial fines as HMRC take inadequate procedures and non-compliance very seriously.
The news is likely to be welcomed by contractors as well, as it will potentially allow more of them to operate outside of IR35.
For advice on the new business size criteria and preparing ahead of time, contact our team.
