* This note highlights the position in relation to established companies. Newly incorporated companies will be able to take immediate advantage of the revised thresholds.
The increase in the Small Companies Regime thresholds may reduce IR35 obligations for some businesses, but for companies established before 6 April 2025, changes will not apply immediately.
The increased Small Companies Regime thresholds are set to deliver administrative benefits for many companies, including in relation to the IR35 off-payroll working rules.
However, while the new thresholds apply for financial years beginning on or after 6 April 2025, for businesses established before that date and who expect to fall within the Small Companies Regime as a result, the reduction in their IR35 obligations does not take effect immediately.
Such companies will not be able to benefit from these changes until the 2027/28 tax year at the earliest, and for some, it could be even later.
Why the delay?
Under the IR35 off-payroll working rules, a company’s size determines whether it is responsible for deciding if an engagement falls inside or outside IR35, and if so, for issuing a Status Determination Statement (SDS). Small companies fall outside of these requirements.
However, when determining a company’s size for IR35 purposes in any tax year, it is necessary to look back a little further than might first be thought, since this needs to be done using the most recent set of accounts that were due to be filed before the start of that tax year.
For example, a company with a 30th June year-end must file its accounts by the following 31st March. This means that the accounts for the year ending 30th June 2026, which must be filed by 31st March 2027, will be used when determining the company’s size for the 2027/28 tax year.
As a result, although the new small company threshold changes apply from April 2025, companies will not see any change to their IR35 obligations until 6 April 2027 at the earliest. This is simply because of the way the Companies Act rules are applied for IR35 purposes.
The two-year requirement still applies
Businesses should also remember that, under Section 382 of the Companies Act 2006, a company needs to meet the relevant size criteria for two consecutive financial years before it can qualify as a small company.
Transitional provisions do, however, address this by allowing earlier periods to also be reassessed using the updated limits.
Existing SDSs
Even when a company becomes small for IR35 purposes, there is an important administrative step that should not be overlooked.
Where workers and any deemed employers have previously received a SDS, the company must formally notify them that it no longer qualifies as a medium or large-sized organisation and that the SDS is being withdrawn from the start of the relevant tax year.
Failing to do this will have significant consequences. If the notification is not given, the company will continue to be treated as a medium or large-sized client for that engagement, meaning the off-payroll working obligations would continue to apply despite the business otherwise qualifying as small.
How we can help
Understanding your obligations under the IR35 regime is a critical HMRC expectation of business including as to when these start and cease. If you have queries in relation to any aspect of the rules our experts can guide you through these.
