Company size threshold changes: but how does this affect the off-payroll rules?

Company size threshold changes: but how does this affect the off-payroll rules?

There’s rarely a quiet month in the world of IR35 – and April is no different.
 
The latest talking point is that around 14,000 businesses are set to be relieved of their obligations under the off-payroll working rules. This change has been brought about by amendments to company size thresholds, introduced on 6th April 2025. So, on the face of it a good news story. Fewer businesses will be impacted by these rules and more contractors will be responsible for their IR35 status. Anything else? Yes. As is often the case, the devil is in the detail and there’s a lot more to this than meets the eye. Read on to find out what these changes mean in practice…

What’s changing?

Amendments to company size thresholds in the Companies Act 2006 mean two of the three criteria for determining a small business have increased. These are…

• Turnover: from no more than £10.2m to no more than £15m
• Balance sheet total: from no more than £5.2m to no more than £7.5m

The third indicator – the 50-employee limit – remains unchanged.
 
These thresholds govern the type and complexity of accounts that companies file, and the change is designed to reduce the administrative burden for thousands of businesses.
 

How does this affect the off-payroll rules?

The knock-on effect is that 14,000 or so medium-sized businesses will reclassify as small.
 
In turn (and in time), they will be relieved of their off-payroll obligations – given these rules utilise the thresholds in the Companies Act and affect medium and large businesses only.
 
Small, non-public sector organisations aren’t tasked with managing the off-payroll working rules. Instead, contractors determine IR35 status when engaged by them – a throwback to pre-reform.
 

What’s the catch?

Cutting to the chase, the benefits of this tweak won’t be felt overnight. In fact, the 2027/28 tax year is the earliest point in time that these businesses will hand back IR35 responsibilities to contractors.
 
The changes only apply to companies whose financial years started on or after 6th April 2025.
So, if a firm’s financial year began before this – and many do – when determining company size for that financial year, the pre-April 2025 thresholds apply. Added to this, the off-payroll working rules rely on complete financial years to establish size, with any change taken forward in the next tax year.
 
With this in mind, any change to company size will take at least 19 months to affect off-payroll obligations.
 

How might it play out in practice?

‘Company A’ has a financial year that starts on 1st June 2024 and ends on 31st May 2025. When determining company size for that year, pre-April 2025 thresholds apply.
 
Why? Even though the company’s financial year end date is after 6th April 2025 when the thresholds changed, the financial year did not begin on or after 6th April 2025.
 
When determining its size for the financial year starting on 1st June 2025 and ending on 31st  May 2026, ‘Company A’ will apply the new size thresholds, as this is the first financial year starting on or after 6th April 2025.
 
So, with the new thresholds applied, ‘Company A’ will shed its off-payroll responsibilities from 6th  April 2027 – because the changes are applied in the subsequent tax year and only after the filing end date of a complete financial year.
 

Key takeaways

So, a lot to digest. And there is, of course, much more to it than this. The countless nuances of the off-payroll working rules mean there are many ways this change could play out in reality.

But in a nutshell, here’s what it means for you:
 

For businesses…

It’s important not to jump the gun. All businesses must continue to prioritise their compliance and how they engage contractors for the foreseeable future.
 

For contractors…

Contractors engaged by businesses that now fall into the small category will be tasked with assessing their IR35 status again and carry the liability. But again, we are some way off this point.
 
As ever, Qdos is on hand to support your compliance now and in the future, as the landscape continues to evolve.