If you’re a limited company contractor working for a small private sector business, you will usually be responsible for deciding your IR35 status, rather than your client.
This is known as the small company exemption. It means that smaller businesses don’t have to carry out IR35 assessments for contractors they engage, unlike medium and large companies.
What is the IR35 small company exemption?
When the off-payroll working rules were extended to the private sector in April 2021, clients became responsible for assessing contractors’ IR35 status.
Small private sector businesses were purposely excluded from these changes.
This means contractors remain responsible for assessing their own IR35 status under the original legislation, which was introduced in April 2000.
What is the definition of a ‘small company’
For the 2026/27 tax year, a company will normally qualify as ‘small’ if it meets at least two of the following three conditions:
- Annual turnover of no more than £10.2 million.
- Balance sheet total of no more than £5.1 million.
- An average of no more than 50 employees.
The company doesn’t need to meet all three of these conditions to qualify.
Extra rules apply to groups of companies, and a subsidiary may not qualify for the exemption even if it appears small (as per the definition above) on its own.
A company’s size is normally assessed over two consecutive financial years, rather than just the latest year’s figures.
What about the new £15 million threshold?
The government recently increased the Companies Act size thresholds for financial years beginning on or after 6 April 2025.
A company can qualify as small if it meets at least two of the following conditions:
- Annual turnover of no more than £15 million.
- Balance sheet total of no more than £7.5 million.
- An average of no more than 50 employees.
However, the new thresholds don’t immediately change a company’s IR35 responsibilities.
Because company accounts and financial years work out a client’s size, the higher limits won’t generally affect off-payroll working obligations until 6 April 2027 at the earliest.
And some companies won’t see a change until April 2028 or later.
This means contractors shouldn’t assume their client is exempt simply because its turnover is below £15 million.
Who decides your IR35 status if the exemption applies?
If you take on a contract with a qualifying small sector client, your own limited company is responsible for deciding whether your contract falls inside or outside IR35.
You need to consider both the written contract and your actual working arrangements, including the degree of control the client has over your work, whether you can provide a substitute, and the obligations to provide and accept work between the parties.
If the contract falls outside IR35, you account for all income from the contract via your contract in the usual way.
If you determine that your contract falls inside IR35, your company must calculate a deemed employment payment and pay the relevant employment taxes. Ask your accountant to help you with this.
How do you check whether your client is small?
If you’re unsure whether your client qualifies for the exemption, you can ask them to confirm their size.
Contractors have a legal right to request confirmation of whether a private sector client qualifies as small for IR35 purposes, and the client has to respond within 45 days.
Assuming your client is a limited company, you may be able to check their latest accounts filed at Companies House, although you might not find enough information to confirm their position, and you can’t make assumptions.
You can’t assume that a company is small simply because it has a small number of employees, or isn’t a well-known business.
Read more in our dedicated guide to who decides your IR35 status.
What about public sector clients?
No, all public sector organisations are responsible for making IR35 determinations, regardless of size.
The small company exemption only applies to private and voluntary sector clients.
There may be different rules if a client is based entirely overseas and has no UK connection.
What should contractors do?
If you’re about to take on a new role, find out who is responsible for the IR35 assessment before the contract starts. Ask your recruitment agent if you use one, or your contact if you’re contracting direct.
If the client is small, your company remains responsible for IR35 assessments. You might consider having a professional IR35 contract review to make sure the way you work (your working practices) match the terms of your contract.
For more background on IR35 in general, read our main IR35 guide for limited company contractors.
If you’re working through your own limited company and need help with your accounts or anything IR35-related, BI Accountancy can help. Get in touch to find out more.
