What does HMRC’s update to company size thresholds mean for businesses and IR35 rules?

Changes to the company size thresholds in the Companies Act 2006 from April 2025 will also apply for the purposes of the off-payroll working rules (IR35). This has implications for businesses as the category of their size will determine whether they fall within IR35.

What are the off-payroll working (IR35) rules?

The off-payroll working rules (IR35) are designed to ensure individuals working like employees, but through their own limited company or partnership, pay broadly the same tax as individuals who are directly employed.

A large or medium business (and any public sector business) engaging a worker through the worker’s professional service company (PSC) will need to be mindful of the off-payroll working rules (often referred to, loosely, as the IR35 rules). Under these rules, the business will need to determine whether the worker would be an employee of the business if, instead, the worker were engaged directly under a contract between the business and the worker (for tax purposes, a worker is either an employee/deemed employee or self-employed – there is no third category of “worker”). If the worker providing the services would be an employee under such a contract, the large or medium business will be responsible for PAYE and National Insurance Contributions in respect of payments made to the worker’s PSC (unless the determination has been passed on from the business to any independent intermediate agent down the contractual chain linking the business at one end and the worker’s PSC at the other, in which case that agent or, if more than one, the agent “closest” to the PSC, will be liable for the PAYE and NICs).

Whether the business (taken as a whole, including UK and non-UK group companies) is large or medium will depend on whether it meets certain thresholds in the relevant financial year (see further below). These thresholds are about to change.

What are the changes to the thresholds?

The turnover and balance sheet thresholds are increasing in the Companies Act, meaning more companies will (subject to timing rules) be considered small and therefore will fall outside the scope of IR35.

Currently, the thresholds of large or medium will be met where at least two of the following apply:

1. the business has an annual turnover exceeding £10.2m;
2. the business has a balance sheet total of more than £5.1m;
3. the business had an average of over 50 employees for the business’ financial year.

With effect from 6 April 2025, however, while the number of employees (50) threshold remains unchanged:

1. the annual turnover threshold is increased to £15m; and
2. the balance sheet total threshold is increased to £7.5m.

In very broad terms, where none or only one of these thresholds is met in two consecutive financial years, the business will be small and so outside the scope of the off-payroll rules (in which case the worker’s PSC will be responsible for the worker’s PAYE and NICs).

The relaxation of these thresholds is clearly welcome for many contractors, who will be able to determine their off-payroll status (rather than being dependent on the businesses engaging them for that determination) and will be relieved from the burden of the off-payroll rules. Similarly, administrative burdens may also be lifted from (end user) clients and recruitment or staffing companies providing workers for those clients. As explained below, however, it may take some time before these new thresholds begin to have effect.

The off-payroll rules generally treat the status of a business (in terms of size) as determined by the most recent financial year for which accounts of the business have been required to be filed. Further, the new thresholds only take effect for financial years beginning on or after 6 April 2025. Given that the accounts of a private company need to be filed at Companies House within nine months following the end of the accounting period (financial year) to which they relate, a “medium” business under the current rules meeting the small business thresholds under the new rules would have to wait until the first tax year beginning after a period of nine months has elapsed following the end of the first financial year of the business beginning on or after 6 April 2025 to be classified as a small business for the purposes of those rules. Such a business would, therefore, only benefit from the revised financial thresholds for the purposes of the off-payroll rules in the tax year beginning April 2027 or April 2028 (depending on the start date of its first financial year beginning on or after 6 April 2025).

Of course, in practice, whether the thresholds in question in relation to any business are reached will vary from (financial) year to (financial) year, and careful monitoring of those thresholds will be needed for the purposes of determining whether in any subsequent tax year the status of the business in question changes for the purposes of the off-payroll rules.

What should businesses be doing now?

Businesses which may be impacted (generally, in a beneficial way) will need to consider whether their status will change as a result of the relaxation of these thresholds. Staffing or recruitment companies together with workers (engaged through their own PSCs) will also need to be aware given the potential shift down the contractual chain to the PSC of PAYE and NICs obligations. Contracts may also need to be updated and/or notices given under existing contracts in the event of any change in the off-payroll status of the business as a result of these changes.

If you have any questions or concerns about off-payroll working rules, please contact tax lawyer Michael Fluss.