The Small Company IR35 Exemption Explained

Since April 2021, most contractors have got used to the idea that the client decides their IR35 status, not them. But that is not the whole story.

If the business you work for is a small company, the rules flip. The client does not have to assess you at all, and the responsibility for deciding whether IR35 applies lands back on you and your limited company.

This catches a lot of contractors out. They assume that because there was no Status Determination Statement, IR35 simply does not apply. That is wrong, and it is the kind of assumption that turns into an unexpected tax bill years later.

This guide explains the small company IR35 exemption in plain English: what it is, exactly how "small" is defined, who carries the risk, and what you need to do when you take on a small client. It is written for limited company contractors working through a personal service company.

What is the small company IR35 exemption?

There are two sets of IR35 rules running in parallel, and which one applies depends on the size of your client.

The newer set, the off-payroll working rules (technically Chapter 10 of ITEPA 2003), came in for the private sector in April 2021. Under these rules, the end client assesses your employment status, issues a Status Determination Statement, and the fee-payer deducts tax and National Insurance if you are caught.

The older set, the original IR35 rules (Chapter 8 of ITEPA 2003), still exists. Under these, you and your own company are responsible for deciding whether IR35 applies and for accounting for any tax due.

The small company exemption is simply the line between the two. If your end client is a small company in the private or voluntary sector, the off-payroll rules do not apply to them. Instead, the original rules apply, and your intermediary, which is usually your own limited company, has to decide your status.

So the exemption is not an exemption from IR35. It is an exemption that shifts the responsibility back to you.

Who decides your IR35 status, and when?

The deciding factor is the type and size of your client. Here is how it breaks down.

When your client is small, HMRC's guidance is clear that the worker's intermediary, normally your personal service company, is responsible for deciding whether the rules apply and for paying any tax and NIC due if you are inside IR35.

The key point is that there is no get-out. You will not receive a Status Determination Statement from a small client, because they are not required to issue one. The absence of a statement is not a signal that you are outside IR35. It is a signal that the decision is yours.

If you are still getting to grips with the basics, our pages for IR35 contractors and limited company contractors set out the wider picture.

How is a "small" company defined for IR35?

For a corporate client, "small" is defined using the same test as the Companies Act 2006 small companies regime. A company is small unless it exceeds the limits, and it becomes medium or large when it meets at least two of three conditions.

For financial years beginning before 6 April 2025, a company was medium or large if it met two or more of these:

There is also a timing rule that matters. A company has to breach the test for two consecutive financial years before it counts as medium or large, and likewise it has to fall below the test for two consecutive years before it drops back to small. This stops a one-off spike in turnover from flipping responsibility overnight.

To work out who is responsible for a given tax year, you look at the client's last financial year for which the deadline to file its accounts ended before the start of that tax year. In practice that means there is a lag between a client growing and the off-payroll rules biting.

What changed for company size from 6 April 2025?

The size thresholds went up. For financial years beginning on or after 6 April 2025, two of the three Companies Act limits increased, while the employee limit stayed the same.

This is a meaningful change for contractors. Because the turnover and balance sheet limits rose, some clients that used to be medium will now count as small once the new thresholds work through their accounts. If that happens, the responsibility for your IR35 status moves from them back to you, often without anyone telling you.

Do not assume your status arrangement from a year or two ago still holds. When a client's size band changes, the question of who decides your status changes with it.

What about groups, overseas clients and sole traders?

A few situations work differently, and they trip people up.

Groups of companies. If your client is part of a group, you look at the parent. Where the parent meets the medium or large test on a consolidated basis, the off-payroll rules apply right across the group, including to small subsidiaries. So a tiny subsidiary of a large group is not small for IR35 purposes.

Non-corporate clients. Sole traders, partnerships and other unincorporated clients use a simplified test. They look only at turnover, and they are small unless turnover is more than £10.2 million for the last financial year ending at least nine months before the start of the tax year. The balance sheet and employee limits do not apply to them. This £10.2 million turnover figure for unincorporated clients was not changed by the April 2025 threshold increase.

Wholly overseas clients. If your end client is based wholly overseas and has no connection to the UK, there is no UK entity that can carry the off-payroll obligations. In that case the responsibility for assessing IR35 sits with you and your own company under the original rules.

If your contract structure is complicated, it is worth getting a second opinion before you assume which rules apply. Our tax advisory service can review the position for you.

Illustrative example: a contractor with a small client

Here is how the responsibility shift plays out in practice.

Illustrative example. Priya runs a personal service company and signs a six-month contract with a fast-growing software firm. The firm's last filed accounts show turnover of £4 million, a balance sheet total of £2 million and 30 employees. It meets none of the medium or large conditions, so it is a small company.

Because the client is small, it does not assess Priya's status and does not issue a Status Determination Statement. The responsibility sits with Priya's company. She and her accountant review the working practices, conclude the engagement is genuinely outside IR35, and keep a written record of the reasoning, the contract and the day-to-day reality of how she works.

Now contrast that with the cost of getting it wrong. Suppose Priya had instead been inside IR35 but had treated herself as outside, and paid herself mainly in dividends. The dividends she took as a basic-rate taxpayer would have been taxed at the 8.75% dividend ordinary rate for 2025/26, far below the income tax and National Insurance an employed equivalent would pay. If HMRC later decides the engagement was inside IR35, her company is on the hook for the shortfall, plus interest and potentially penalties.

That is why the record keeping matters. With a small client, no one else is making this call for you, and no one else is carrying the risk.

You can sense-check the take-home difference between inside and outside IR35 using our take-home pay calculator and dividend tax calculator before you agree how to draw your income.

What should you actually do when your client is small?

Treat a small client as a prompt to do your own homework, not as a free pass. In practice, this means a short, repeatable routine.

First, confirm the client really is small. Ask about their size, check their filed accounts at Companies House, and remember the group rule if they are part of a larger structure.

Second, assess your status honestly. Look at the genuine working practices, not just the wording of the contract. Substitution, control and mutuality of obligation are the areas HMRC focuses on. HMRC's Check Employment Status for Tax tool is a reasonable starting point, though it is not the last word.

Third, keep the evidence. Save the contract, a written status conclusion, and notes on how you actually work. If your view is ever challenged, contemporaneous records are worth far more than a memory of what you thought at the time.

Fourth, get the income mix right. If you are genuinely outside IR35, you can usually pay yourself through a tax-efficient blend of salary and dividends. If you are inside, the deemed payment rules change the picture entirely.

This is exactly the kind of judgement call where a second pair of qualified eyes pays for itself.

Working with a small client and not sure who decides your IR35 status? Book a free 20-minute call with a Zmartly accountant and we will review your contract and working practices with you.

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