From 6 April 2025, approximately 14,000 medium-sized firms will be reclassified as small businesses due to changes in company size thresholds.
This reclassification means that these businesses will no longer be responsible for managing the off-payroll working rules, with IR35 compliance shifting back to limited company contractors.
For contractors, this marks a return to the pre-2021 IR35 rules, where they are responsible for determining their own IR35 status and bear the tax liability.
For smaller businesses, this change removes an administrative burden that has often led to overly cautious determinations, pushing contractors into umbrella companies or ‘inside IR35’ engagements.
As a result, many smaller firms may now be more open to engaging limited company contractors outside IR35, given that the tax liability is no longer on them.
What are the new company size thresholds?
The new thresholds, effective from 6 April 2025, are as follows:
| Company Size | Turnover (£) | Balance Sheet Total (£) | Average No. of Employees |
| Micro | Up to £1 million (previously £632,000) | Up to £500,000 (previously £316,000) | Up to 10 (unchanged) |
| Small | Up to £15 million (previously £10.2 million) | Up to £7.5 million (previously £5.1 million) | Up to 50 (unchanged) |
| Medium | Up to £54 million (previously £36 million) | Up to £27 million (previously £18 million) | Up to 250 (unchanged) |
A business is classified based on meeting at least two out of the above three criteria.
What does this mean for smaller firms engaging contractors?
With the reclassification, many businesses that previously had to determine IR35 status and take on tax liability for incorrect assessments will now be relieved of this responsibility.
This could lead to a change in how smaller firms engage with contractors, as they will no longer be deterred by the compliance risk associated with IR35.
Many of these businesses are likely to become more open to engaging limited company contractors outside IR35, given that the financial risk is now entirely with the contractor.
For limited company contractors, this presents a potential increase in opportunities to work outside IR35, as businesses previously reluctant to engage them may now be more open to doing so.
How will we help you with these changes?
With IR35 liability switching back to contractors, ensuring compliance is more important than ever.
We will be working with our clients to carry out full IR35 assessments where applicable to ensure that contractors and businesses are correctly classifying engagements.
If a business now classed as ‘small’ wishes to engage limited company contractors outside IR35, we will ensure compliance checks are in place to safeguard you from any potential tax liabilities or risks.
For contractors, the changes offer the potential for increased flexibility and the ability to work outside IR35 again.,
We will be working closely with our clients to ensure that any engagement outside IR35 is properly assessed and compliant, mitigating risks for all parties involved.
If you need advice on IR35 assessments or the upcoming changes, contact our Admin team – admin@cogentaccountants.co.uk – about how we can support your business.