The IR35 small company exemption is set to widen from April 2027, with updated thresholds bringing more businesses within the definition of “small” and outside the off-payroll working rules. Where a client qualifies as small, responsibility for determining employment status shifts back to the personal service company (PSC) itself. HMRC scrutiny of those determinations has increased in step, so a wider exemption is not the relief some contractors expect.
What the Exemption Change Actually Does
Under the off-payroll working rules (Chapter 10, ITEPA 2003), a medium or large end client is responsible for issuing a status determination statement and, where a contractor is inside IR35, for deducting tax at source. When the client is small, that obligation does not apply. The PSC decides its own status under Chapter 8 and bears the consequence of getting it wrong.
The April 2027 change follows the higher Companies Act size thresholds that took effect on 6 April 2025. A company qualifies as small if it meets at least two of three tests: turnover of £15m or less, a balance sheet of £7.5m or less, or 50 employees or fewer. The two-year look-back rule delays the practical effect until 6 April 2027, which is why the earliest a reclassified company can be treated as small for off-payroll purposes is the 2027/28 tax year.
HMRC estimates around 10,000 to 14,000 medium-sized companies will reclassify, at an Exchequer cost of roughly £20m a year in IR35 non-compliance. This is a return to the pre-2021 division of responsibility for a defined group of engagements, not a wholesale reversal of the reforms.
Why a Wider Exemption Means More Risk, Not Less
A common misreading treats the small company exemption as a route out of IR35. It is not. The rules still apply to the engagement; only the person carrying the determination burden changes.
HMRC continues to use data matching across PAYE, self-assessment and company accounts to identify non-compliant off-payroll arrangements. The 2021 private-sector reforms affected around 120,000 contractors and generated £4.2bn in additional tax, National Insurance and apprenticeship levy by March 2023. That baseline explains why enforcement remains active, and why a PSC that assesses itself as outside IR35 without a defensible basis is exactly the kind of arrangement those tools are built to surface.
The exposure sits with the contractor in these cases:
- The PSC, not the client, is liable for unpaid tax and National Insurance if the determination is wrong.
- Determinations must be reasonable and evidenced, not convenient.
- HMRC can review historic engagements, so a decision made in 2027 can be challenged years later.
What Contractors and Agencies Should Do
Contractors moving back into self-assessment territory need to treat status seriously. The questions that decide IR35 have not changed: control, personal service and mutuality of obligation remain the substance of any assessment.
Sensible preparation includes:
- Confirm whether each end client meets the small company definition under the April 2027 thresholds.
- Keep evidence supporting every status determination, including contracts and working practices.
- Retain determinations and supporting material for the full period HMRC can review.
- Take proper advice where an engagement is genuinely borderline rather than defaulting to the outcome that pays more.
For agencies, the position is narrower. Where the end client is small, the off-payroll rules do not apply and the agency carries no IR35 determination liability for that engagement. What the agency needs is comfort that the client genuinely meets the small company definition. The client has a duty to confirm its status within 45 days of a request, so agencies should obtain and record that confirmation rather than assume it. Get the client’s small status wrong, and the off-payroll obligations may still bite.
FCSA’s Position
A wider small company exemption redistributes responsibility; it does not reduce the amount of compliance the sector must carry. Contractors gaining control of their own determinations from April 2027 also gain the liability that comes with them. Evidence, reasonable care and accurate timing remain the tests that stand up to scrutiny.
FCSA Members operate to standards that require sound processes and transparent supply chains, which is where contractors and agencies find the assurance the exemption itself does not provide. For those mapping their obligations before the threshold change, the FCSA Members register confirms which providers meet the standard, and FCSA Accreditation sets out what that standard covers.
