IR35 can still apply when you are providing services to a small company. However, the IR35 small company exemption changes who is responsible for assessing IR35 status, rather than removing the need for an assessment altogether. Understanding this distinction is important, as it helps contractors and small businesses understand who is responsible for making IR35 status decisions and complying with the rules.
Our guide below, created in collaboration with Markel Tax, explains what the IR35 small company exemption is, when it applies, and what it means for contractors.
What is the IR35 small company exemption?
Before the private sector off-payroll reforms came into force in April 2021, contractors working through their own limited companies were responsible for determining their own IR35 status. They were also liable for underpaid tax and National Insurance if HMRC successfully challenged an outside-IR35 determination.
While the reforms transferred that responsibility to many end clients, the government created an exception for qualifying small businesses. As a result, where a client meets the definition of a small company, responsibility for assessing IR35 generally remains with the contractor’s intermediary, usually their personal service company (PSC). GOV.UK guidance states that where services are provided to a qualifying small client, it is normally the intermediary that decides the worker’s employment status and whether the rules apply.
It is important to note that this is not an exemption from IR35 itself – it is an exemption from the client-led off-payroll working rules.
Does IR35 still apply when working for a small company?
A common misconception is that because a client qualifies for the IR35 small company exemption, the engagement automatically falls outside IR35. However, that is not the case as the same underlying question still applies:
If the contractor had been engaged directly by the client, would they have been regarded as an employee for tax purposes?
If the answer is yes, the engagement will be inside IR35. If the answer is no, it will be outside IR35. The difference is that, for qualifying small clients, the contractor’s PSC is normally responsible for reaching and documenting that decision.
Our guide to IR35 explains how the rules of the legislation work and who they apply to.
What qualifies as a small company for IR35 purposes?
For financial years beginning on or after 6 April 2025, a company will generally qualify as small if it meets at least two of the following criteria:
- Annual turnover of no more than £15 million
- Balance sheet total of no more than £7.5 million
- No more than 50 employees
Please note: This article was written in September 2026 – please always check the current criteria on the official GOV.UK page.
Who determines IR35 status when the client is small?
Where a client qualifies for the IR35 small company exemption, the contractor’s PSC is typically responsible for:
- determining whether the engagement falls inside or outside IR35
- reviewing both contractual terms and working practices for all relevant engagements
- maintaining supporting evidence
- accounting for any tax and National Insurance liabilities that arise if the engagement is inside IR35
Contractors assessing their own status should review factors such as:
- control
- substitution
- mutuality of obligation
- financial risk
- provision of equipment
- whether they are genuinely operating as a business
For a detailed breakdown of these factors, visit our guide on how to determine your IR35 status.
HMRC also provides the Check Employment Status for Tax (CEST) tool, which may support status determinations. However, it should not be viewed as a substitute for understanding the full circumstances of an engagement.
What does the exemption mean for contractors?
From a contractor’s perspective, the IR35 small company exemption can be beneficial because their intermediary normally retains responsibility for the status assessment rather than relying on an end client’s determination.
However, that benefit comes with additional responsibility. If you work for a qualifying small company, you are generally responsible for:
- assessing your own IR35 status
- keeping appropriate records
- demonstrating reasonable care
- defending your position if HMRC challenges it
If HMRC ultimately disagrees with your assessment, the liability can sit with your intermediary rather than the client.
Some contractors choose to obtain independent professional advice and may also consider whether specialist insurance is appropriate for their circumstances. To learn more about an HMRC enquiry or investigation, visit our guide to HMRC investigations.
Frequently asked questions about the IR35 small company exemption
Can a contractor still be inside IR35 when working for a small company?
Yes, the engagement may still fall inside IR35 depending on the contractual terms and actual working practices.
Does the IR35 small company exemption affect sole traders?
Generally, no. IR35 applies where services are provided through an intermediary such as a limited company or in some cases a partnership. Sole traders are instead subject to employment status rules.
Can agencies still have responsibilities?
Yes, HMRC notes that agencies may still have obligations under the off-payroll working rules regardless of their own size.
What should contractors remember about the IR35 small company exemption?
The most important thing to understand about the IR35 small company exemption is that it changes who is responsible, not whether IR35 applies.
Where a qualifying small company engages a contractor through a PSC, responsibility for determining IR35 status generally remains with the contractor’s intermediary. The engagement still needs to be assessed, and contractors should ensure that any decision is supported by both the contract and the real working practices.
How can a contractor find out if a client qualifies as a small company?
A contractor can ask the client to confirm in writing whether it qualifies as a small company for the purposes of the off-payroll working rules.
Please note: Legislation, thresholds, and HMRC guidance can change – always seek tax or legal advice from a qualified professional.
Discover our knowledge centre for more help and guidance or read more about Caunce O’Hara’s contractor insurance.
If you are seeking tax-related guidance as a contractor, you can contact Markel Tax or explore IR35 tax losses insurance.
Please note: This article provides guidance for information purposes only and is accurate at the time of production. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional for personalised tax or legal advice. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Caunce O’Hara. Caunce O’Hara is not affiliated with any of the brands, companies or websites mentioned in this article.
