A rejig of the government regulations used to Classify company sizes will cost the treasury Around £ 20m in Lost Tax Each Year Due to IR35 Non-CompliaceAccording to a freedom of information (Foi) Response from HM Revenue & Customs (HMRC).
The UK government introduced changes on 6 April 2025 that increase the balance sheet and turnover thresholds used to determine your computeries Businesses, as per the terms of the company 2006.
Under the rewerked criteria, a company will be classified as a small business if they have an aggregate turnover of £ 15m or less and a balance sheet of 7.5m.
Previous, to Qualify as a small business, a company would need a turnover of less than £ 10.2m and a balance sheet of £ 9m or less.
Government Figures Sugged The Change will result in 10,000 medium-sized businesses Falling out of the private sector IR35 off -Payroll reforms, as a result of them eating reclassified as Businesses.
The reforms, which came into force in April 2021, made medium-to-trade companies responsible for determining if the contractors they engage should be taxed in the contractor Same Way as Off-Payroll Employees (OutSide IR35) or in the same way as salaarized works (Inside IR35),
Before the private sector reforms came into force, contractors was responsible for determining with the work they did and how it was carred out meants Or outside IR35.
According to the government's oven figures, the change in business size classifications looks set to impact 20,000 contractors who are engaged by medium-to-trade businesses.
However, Computer Weekly Has Seen HMRC's Response to an Foi Request, Submitted By Dave Chapline, CEO of IR35 Compliance Company IR35 Shaield, Which Sugges the Changes Will Hawa A APENTAL hai Impact on the Treasury's IR35-Related Tax.
The Document States that HMRC produced an estimate that sugges the changes to company size turnover and balance sheet thresholds will cost the exchequer £ 20m Each Year Due to CONANGES Failing to complete with the IR35 rules.
“It is estimated that Around 1.5%, or between 2,000-to-2,500 of all individuals within the off-peking rules and working for medium- or large-szed businesses Revert to Non-Compliance with the IR35 rules as a result of the definition change, “said hmrc in its foi response.
“It's estimated they will pay in the region of £ 10,000 less in tax per year as a result, making a total loss of revenue of around £ 20m in tax Liabilityies per year. Compliant Behavior, SINCE Contractors Alreadi Paying Correct Taxes would have been unafeed by off -Payroll reform and do not contribute to the additional revutes to collection. “
Speaking to Computer Weekly, Chaplin Said That While HMRC expects that 20,000 Contractors will be affected by the changes, this should not result in the Amount of Taxes in the treasury.
“It's important to note that just because the tax labor shifts to the contractor that does not give the contractor a license to ignore the Original Legislation, Which will still before,” Chaplin. “All that changes is that tax liability switches back from the client to the contractor, hence no change in taxes paid.”
Switching Responsibility
Chaplin said contractors should also take not of the fact that the changes made to the companys act 2006 This is government the earliest a Medium Company Can Qualify as Small where his IR35 obligations are concerned is 6 April 2027, As confirmed by an update to the hmrc employment status manual on 8 April 2025,
,[And] Let's be clear: the number of contractors that this may benefit is minimal and the fundamental challenges with IR35 remain, continuing to impede the flexibility of broitain's independent works, ”
“The off -Payroll Rules Continue to Force Contractors Into Suboptimal Quasi-Employment Models and Place an Unnecessary Burden on UK Enterprises. IF Labor Wants meaningful Changes Growth, they need to address IR35 ITSELF, Not Just Adjust Reporting Thresholds. “
Even so, seb maley, cetra of contractor insurance company QDos, said there will be contrastors out there who will be disappointed by the time lag between the changes being IR35 Perspective.
“It's going to feel like one step forward two steps back for freelancers and contractors engaged by these medium-sized firms that are set to be relieved of the off-a-payrolls,” he said.
“There was hope this change would kick in overnight, but a government [Employment Status Manual] Update has revised the devil in the detail, “said maley. Effectively, assessing if they pay tax as a self-comloyed worker or employee. “
In the interim, all contractors can do, he said, is sit tight and allow their clients to continue feeling the administer burden of ir35.
“That being said, if a freelancer's concerned their client has Misapplied their IR35 Status, they're well with Maley.