The Small Company Exemption from IR35: Does Your Client Qualify?

Since April 2021, the off-payroll working rules place the responsibility for deciding a contractor's IR35 status on the end client — but only if that client is not a 'small company'. If the client qualifies as small, the older rules continue to apply, and the contractor's own limited company remains responsible for its own status determination.

The small company test

A client is generally treated as small if it meets at least two of the following three conditions for its most recent financial year:

• Annual turnover of not more than £10.2 million.
• A balance sheet total of not more than £5.1 million.
• No more than 50 employees.

For unincorporated organisations, a simplified turnover-only test applies. A newly formed company is usually assessed against its first financial year, and status can change from one tax year to the next as a business grows past — or shrinks below — these thresholds.

Why this distinction matters so much

If your client is small, you are back in the pre-2021 world: your own personal service company assesses whether the engagement is inside or outside IR35, and carries the risk of getting that assessment wrong. If the client is medium or large, they must issue a Status Determination Statement and the fee payer in the chain becomes responsible for deducting tax if the engagement is inside IR35.

How to find out if a client is small

• Ask the client directly — many will tell you plainly whether they consider themselves within the small companies regime.
• Check the company's most recently filed accounts at Companies House, which will usually state whether small company exemptions were applied.
• For a group structure, the test can apply at group level rather than to the individual contracting entity — this is worth clarifying if your engaging client sits inside a larger group.

What to do either way

Whether your client is small or not, the underlying question — are you genuinely in business on your own account, or effectively working as an employee — does not change. The small company exemption only changes who is legally responsible for making and documenting that determination, not the tests HMRC applies to decide whether it is correct.