If your business engages personal service company (PSC) contractors and is approaching a transition out of the Off-Payroll Working small company exemption, you’ll need to start applying the Off-Payroll Working rules. These rules have applied to medium and large companies since April 2021 and require businesses to assess their contractors’ IR35 status, issue Status Determination Statements, and keep proper records.

Small businesses are currently exempt, but if your company is growing or being acquired, the exemption may no longer apply.  You must take steps to understand your new responsibilities and how to get yourself ready.

When does the Off-Payroll Working small company exemption no longer apply?

Whether a company qualifies as small is based on the criteria set out in section 382 of the Companies Act 2006.

A business loses the small company exemption when it exceeds two out of the three thresholds below, for two consecutive financial years. At that point, Off-Payroll Working small company exemption is lost and the rules apply from the relevant tax year.

NB: The thresholds were updated for financial years beginning on or after 6 April 2025, with a transitional rule that may delay when your company is treated as medium or large.

New thresholds (for financial years beginning on or after 6 April 2025):

• Turnover of over £15 million
• Balance sheet total of over £7.5 million
• An average of more than 50 employees (unchanged)

Transitional provision: If your company’s financial year begins on or after 6 April 2025, you may apply the new thresholds when assessing your size for that year and the previous year. This helps determine whether you’ve met the conditions for two consecutive years – potentially delaying when you are classed as medium or large under the two-year rule.

Previous thresholds (for financial years beginning before 6 April 2025):

• Turnover of over £10.2 million
• Balance sheet total of over £5.1 million
• An average of more than 50 employees

What is the relevant Financial Year?

A company’s size for Off-Payroll Working purposes is determined by using the last financial year for which the accounts filing deadline falls before the start of the relevant tax year.

Put simply, size is assessed one step back from the tax year in question.

Example: If your company’s accounts filing deadline for a financial year falls before 6 April 2026, then that year determines your size for the 2026/27 tax year.

Losing the Off-Payroll Working small company exemption through acquisition

A business will also move out of the small company exemption if it is acquired by a large company or group even if the standalone figures remain small, with the size now being determined by that of the parent company.

Once part of a large group, the company will lose the Off-Payroll Working small company exemption from from the tax year linked to the first financial year in which it was in the group (even if the acquisition was part-way through the FY), based on the filing deadline test.

Important: There is no two-year grace period in these cases. If you’re acquiring a small business that engages contractors, you must ensure that it applies the OPW rules on time to avoid non-compliance.

Steps to prepare for Off-Payroll Working responsibilities

If you’re approaching a transition out of the small company exemption, or have just been acquired, these steps will help you get ready:

1️⃣Identify your contractor population

Begin by reviewing how many contractors your business engages through personal service companies (PSCs). You’ll need to determine:

• Which contractors fall within scope of the Off-Payroll Working rules
• How these contractors are currently engaged and under what terms

To do this effectively, you’ll need to map your supply chains. This includes:

• Contractors engaged directly
• Any supplied through recruitment agencies
• Any contracted-out services delivered via outsourced providers or consultancies

2️⃣Audit your supply chains

Once you’ve identified where your contractors are, establish:

• All parties in each contractual chain (including agencies and consultancies)
• Who the Fee Payer will be for each engagement (as they bear the PAYE responsibilities)
• Whether your suppliers are aware of the Off-Payroll rules and equipped to manage their role in the process
• Relevant points of contact for OPW-related communication

This is especially important where you rely on agencies or third-party suppliers to engage contractors on your behalf.

3️⃣Establish internal roles and responsibilities

Determine who in your organisation will be responsible for:

• Making status determinations
• Issuing Status Determination Statements (SDSs) and managing communications with contractors and agencies
• Handling disputes and appeals
• Record-keeping and re-assessments

4️⃣Establish your processes

You will need to establish and document robust processes covering your legal obligations. These should include:

• A process for making the Off-Payroll status determination, covering:
  • when and how this is undertaken
  • what information is used and who provides it
  • whether any tools are used
  • how SDSs are issued, and who to (NB – the worker and any other party you contract with requires these)
  • template communications
  • how records are kept
  • how re-assessments are triggered at regular check-points or when something changes
• A process for dealing with disputes and appeals from contractors, which must be dealt with within 45 days.
• Processes for ensuring PAYE is applied on your payroll where appropriate.

5️⃣Get your written contracts in order

Before you reach the point of sending out your SDSs, ensure that all your written contracts accurately reflect the reality of the engagement. A well-drafted contract is important, and forms evidence to support your determinations.

6️⃣Train staff

Make sure key teams (HR, procurement, project leads, finance, etc) understand:

• What the Off-Payroll Working rules require
• How OPW / IR35 status is decided and basic case law principles
• How your internal processes work
• How to spot risks in contracts or working practices

7️⃣Notify your existing contractors in advance

Early and clear communication can reduce confusion and resistance later on. You should notify your existing contractors in the months prior to your responsibilities coming into force to tell them:

• What’s happening and why
• That they will receive a Status Determination Statement setting out your IR35 decision and the reasons behind it
• What their rights are, including how they can challenge the outcome

8️⃣Seek specialist help if necessary

Organisations are required to take reasonable care when applying the Off-Payroll Working rules, and HMRC recognises that this may include seeking advice from a specialist.

If you’re unsure how to assess status correctly, what to include in your Status Determination Statements, whether your supply chain is compliant, or how to handle more complex contractual arrangements, it’s a good idea to consult an IR35 expert. Taking advice early on can save you significant time, reduce risk, and help avoid costly mistakes later.

Putting it into practice

Once you are out of the Off-Payroll Working small company exemption, you should put your processes into action for all existing contractors engaged through personal service companies, as well as for any new contractors as they come on board.

Status Determination Statements must be issued in line with your internal process, and all decisions should be communicated clearly to the contractor and any other relevant party. It’s essential to keep accurate records of every determination and the reasoning behind it, and to regularly monitor each engagement for any changes that might affect the IR35 status.

If you’re ever in doubt, seek expert help – it’s far easier and more effective to get things right at the outset than to try to resolve issues later.

Don’t leave it too late

Losing the Off-Payroll Working small company exemption means joining a complicated compliance framework that many large businesses still struggle to get right. With HMRC’s compliance activity at an all-time high, early preparation is essential to avoid costly investigations and potential penalties – and the right support can make all the difference.

Bauer & Cottrell can help with:

• IR35 status assessments
• IR35 compliance audits
• Support with transitioning to the Off-Payroll rules

 Browse our full range of services for engagers here.