The government’s update to how it classifies company sizes could cost the Treasury about £20 million each year in lost tax revenue due to IR35 non-compliance. This comes from an FOI response from HM Revenue & Customs (HMRC).
As of April 6, 2025, the UK government raised the thresholds for what makes a company micro, small, or medium-sized. Now, to be a small business, companies need a turnover of £15 million or less and a balance sheet total under £7.5 million. Before this, small businesses had to keep their turnover under £10.2 million and balance sheets below £9 million.
The changes could reclassify about 10,000 medium-sized businesses as small ones, meaning they will no longer have to comply with IR35 off-payroll rules. These rules, effective since April 2021, made medium-to-large firms responsible for deciding whether contractors should be taxed like employees or self-employed workers.
Before these reforms, it was up to the contractors themselves to determine their tax status. The government estimates that around 20,000 contractors working with medium-to-large companies will be affected by the new classification. However, HMRC’s FOI response warns that this shift could significantly affect tax revenue. They estimate around 1.5% of those under off-payroll rules may end up non-compliant, costing about £20 million annually in lost tax.
HMRC notes that about 2,000 to 2,500 individuals might change their employment arrangements due to the reclassification. They will be paying roughly £10,000 less in taxes each year, contributing to that projected revenue loss. HMRC points out that compliant contractors won’t see any increase in tax liability since they were already adhering to the rules.
Dave Chaplin, CEO of IR35 Shield, commented that even though HMRC expects a shift in tax burdens, it shouldn’t affect the total taxes received by the Treasury. “Just because the tax liability switches back to the contractor, it doesn’t mean they can ignore the original legislation,” he said.
He also highlighted that the changes to the Companies Act will likely have little impact for contractors for at least two more years, as medium-sized companies won’t qualify as small concerning IR35 until April 6, 2027. He cautioned that the fundamental issues with IR35 remain, creating challenges for the independent workforce. Chaplin emphasized that real reform is needed, not just changes to reporting thresholds.
Seb Maley, from Qdos, noted that some contractors will feel let down by the gap between changes being announced and their actual impact on IR35. “It’s one step forward, two steps back for freelancers,” he remarked. Many had hoped these changes would take effect immediately, but the update clarified that they still face another two years of uncertainty.
In the meantime, contractors can only wait while clients bear the administrative weight of IR35 compliance. Maley advised that if freelancers believe their IR35 status is wrongly applied, they should seek a second opinion to challenge that determination.