IR35 Small Company Exemption: Are You Exempt?

What the small company exemption means

When the off-payroll working rules were reformed in 2021, Parliament included an exemption for small businesses. The rationale: large organisations have the compliance infrastructure to assess IR35; small businesses do not. The exemption does not remove IR35 from small client engagements — it simply puts the assessment responsibility back with the contractor's company, as it was for everyone before April 2021.

The three-part size test

A client is 'small' if it satisfies two or more of the following conditions based on its most recent filed accounts:

If the client meets any two of these three, the off-payroll rules do not apply to that engagement. The client does not need to issue an SDS, and your company assesses IR35 status independently.

Worked example: Is this client small?

Client A: turnover £8m, balance sheet £6m, 45 employees.

• Turnover: £8m ≤ £10.2m ✓
• Balance sheet: £6m > £5.1m ✗
• Employees: 45 ≤ 50 ✓
• Result: meets 2 of 3 — small company, exemption applies

Client B: turnover £15m, balance sheet £4m, 35 employees.

• Turnover: £15m > £10.2m ✗
• Balance sheet: £4m ≤ £5.1m ✓
• Employees: 35 ≤ 50 ✓
• Result: meets 2 of 3 — small company, exemption applies

What 'self-assessing' actually means

When the exemption applies, your company determines your own IR35 status — but this is not a rubber-stamp. HMRC can still open an enquiry and challenge your self-assessment. The difference from a large-client engagement is:

• The client does not need to issue an SDS
• If HMRC investigates and finds you should have been inside IR35, the tax liability falls on your company (not the client)
• You have full control over the determination — but full responsibility for getting it right

How to document your self-assessment

Good documentation is your protection in an HMRC enquiry. At the start of each small-client engagement:

1. Run HMRC's CEST tool and save the full output (including your answers)
2. Write a brief status summary covering the three core tests: substitution, control, MOO — with specific reference to your contract and working practices
3. Consider commissioning a professional IR35 review (£200–£500) for any contract above £60,000/year
4. Review and re-document at each renewal — working practices can drift over time

When does the test apply?

The client size test is assessed at the start of the engagement based on the client's most recently filed accounts. It is not re-assessed during the engagement, but it should be checked again at any renewal — particularly for fast-growing clients approaching the thresholds.

If a client crosses the size thresholds between contract renewals, the exemption may no longer apply for the next engagement period. The client becomes responsible for issuing an SDS going forward.

Public sector: no exemption

Public sector bodies — central government, NHS, local authorities, universities, and other public bodies — are never exempt from the SDS requirement, regardless of size. The off-payroll rules for the public sector have applied since 2017 and have no small organisation carve-out.

Charities and other organisations

Charities follow the same small company test as private sector organisations — they can qualify for the exemption if they meet two of the three size criteria. However, charities that are classified as public sector bodies (e.g., certain NHS charities) may fall under the public sector rules instead.

Common mistakes

• Assuming the exemption means IR35 does not apply — it does. You still need to assess and document your status. The exemption changes who does the assessment, not whether IR35 exists.
• Not checking the client's size — always verify the client meets the small company test before assuming you can self-assess. Companies House filings are publicly available.
• Failing to review at renewal — a client that was small two years ago may have grown. Check the test at each contract renewal.
• Not documenting the self-assessment — the most common mistake. Without documentation, an HMRC enquiry is very difficult to defend, even if the underlying position is correct.