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As of the 6th April 2025 the government has increased the monetary size thresholds that determine if a company is a small or medium sized business. This change will affect the market for contractors as it will shift the burden of IR35 legislation from some businesses back onto the contractor. This is likely to result in a more buoyant contractor market as there is less risk for the newly classified small businesses in taking on contractors as they are not responsible (and therefore have no liability) for the determination of the contracts they offer.

Previously to be classed as a small business a company had to satisfy two of the following three rules: annual turnover not more than £10.2m, balance sheet total not in excess of £5.1m, and monthly average number of employees to not exceed 50. Under the new rules the turnover threshold has increased to £15m and the balance sheet total to £7.5m with the monthly average number of employees remaining at 50.

These changes will see an estimated 14,000 medium sized businesses be reclassified as small businesses, therefore alleviating them of the burden of status determination for IR35. This regulation change will impact contractors and should lead to an increase in contracts offered by newly classified small businesses.

The reclassification of some medium sized businesses to small businesses is a welcome move for contractors as it mitigates the risks for the newly reclassified end clients and instead places the burden on contractors. While it may seem daunting to be responsible for the determination of your own employment status, contractors can use tools such as HMRC’s Check Employment Status for Tax (CEST) tool as well as seeking professional advice from a specialist or accountant.

Seb Maley, CEO of IR35 specialist, Qdos, said:

Maley went on to add:

The recent regulation changes will absolve some businesses of complex determination cases and may cause many companies to return to utilising off payroll workers, free of any fear of incorrect determination.

Contractors who carry out work for small businesses and overseas clients are responsible in deciding their IR35 status. It is important that contractors understand the key facets of what makes a contract inside or outside IR35 when making the determination.

When employed by a small business, contractors are wholly responsible for determining their contract status and therefore their potential tax positions. It is vital to get this right as if they are inside IR35 they must follow PAYE income tax rules and pay National Insurance contributions as if they were an employee. Incorrectly determining status can be costly and result in significant tax bills.

HMRC can investigate your arrangements at any time, which has the potential to be time-consuming, costly and stressful. This may include a review of tax returns from the previous year. It could also go back, up to six years, if careless or negligent behaviour is suspected.

If a contract is outside the scope of the IR35 legislation however, there are significant tax advantages over working in an employee role. many contractors choose to operate through a limited company in order to pay themselves tax efficient salaries, offer flexibility in taking out dividends, and make employer pension contributions. The rate of tax on dividends is lower than the equivalent rate on PAYE income and can offer significant tax savings, when advised by an accountant, to maximise your tax efficiency.

Deciding if a contract is inside or outside the scope of IR35 needs care. HMRC has tools like the Check Employment Status for Tax (CEST) to help contractors gain clarity over their working arrangements. The added benefit of using the CEST tool is that, provided information is accurate, HMRC will stand by all determinations given by the tool. That said, small changes in your inputs may significantly impact the outcome of the tool and therefore professional advice is advised in addition to using CEST.

Accountants and IR35 specialists, such as Sherwin Currid, can provide expert guidance and contract reviews to advise contractors on their status determination. If the burden of determination lies with you as a contractor then it is important to seek professional, expert, advice to ensure you are operating in compliance with the rules as well as tax efficiently.

To ascertain if a contract falls inside, or outside, the scope of IR35 there are several factors that HMRC regard as important. Knowing what these factors are and what to demand of a contract is vital to ensuring compliance with the intermediaries legislation.

We have outlined the most important factors below but to be certain of your status determination we advise you to seek professional advice.

Supervision regards the extent that your end client oversees your work and controls quality and design of the end product. If you are being held to standards by someone overseeing your progress and output then it is likely you will fail this test and be determined too be operating inside the scope of IR35.

Direction refers to how much input is received from you by your end client while you undertake the work you are contracted for. Independent contractors should ideally be engaged to provide services the client’s employees cannot do. It is therefore expected that independent contractors should be able to carry out the assignment without any training from the client, except for a reasonable induction and any health and safety briefings required.

Control is essentially to what extent are you treated as an external contractor employed to undertake a predetermined task. Your end client must not change around your work and should not move you from task to task based on their priorities. Using your own equipment, not working on site and setting your own hours can all help prove there is no control. Maintaining full autonomy from the end client is vital to ensuring you qualify as outside the scope of IR35.

The right of substitution is another pointer of being outside IR35. As an independent contractor you are only obligated to present the end product as agreed upon between you and your end client, this does not necessarily mean you must carry out the work yourself. Having proof in your contract that you have the right to provide a substitute can greatly help you in proving your status as outside the scope of IR35.

Beware of fettered clauses however, if your contract says you have the right to provide a substitute, subject to the prior approval of management, then you probably do not have the right to provide a substitute at all. This will bring into doubt your status as an independent contractor and therefore may place you inside the scope of IR35.

Mutuality of obligation is a concept in employment law whereby employers are obliged to provide work and employees are obliged to accept the work. HMRC’s guidance states that the basic requirements for mutuality of obligation are that the engager must be obliged to pay a wage or other renumeration and that the worker must be obliged to provide his or her own work or skill. If you cannot clearly demonstrate that there is a lack of obligation to undertake work or receive payment from your end client this may damage your argument of being an independent contractor.

If you are a contractor, or thinking of becoming one, Sherwin Currid can help you with managing all aspects of your accounting and tax, including IR35 status determination. We provide expert assistance in advising on the complexities of IR35 for contractors across a wide array of sectors meaning we have experience with a variety of contracts and situations.

We also provide contractors with full service accountancy packages including year end accounts, self assessment filings, unlimited professional advice, PAYE registration and VAT services. Furthermore, all of our clients are given access to cloud accounting software that can be used to minimse time spent on bookkeeping as well as simplifying the raising of invoices or reclaiming VAT from expenses.

With over 15 years of experience working with contractors we understand the intricacies of freelance work as well as IR35 legislation. We are here to simplify the process for you and ensure you can spend more time focusing on servicing your end-client.