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What the small company exemption means

Since the 2021 private sector reforms, responsibility for determining a contractor's IR35 status sits with the end client. If your client says you're inside IR35, they carry that decision and deduct tax accordingly. If they say outside, they carry the liability if HMRC disagrees.

There was, however, an exemption. Small companies were excluded from this responsibility. If your client met the definition of a small company under the Companies Act 2006, the old rules applied — meaning you as the contractor were responsible for your own determination, just as before 2021.

That exemption hasn't been removed. But the definition of small has shifted in a way that quietly catches more companies than before.

What changed in April 2026

The small company thresholds — which hadn't been meaningfully updated in over a decade — were revised under the Companies (Increase in Size of Thresholds) Regulations. A company qualifies as small if it meets at least two of these three criteria:

The more significant practical impact comes from changes to how associated companies and group structures are assessed. Previously, a subsidiary could claim the small company exemption even if its parent group was large. That route has been significantly tightened under the updated regulations.

The net result: approximately 14,000 PSC contractors who were previously responsible for their own IR35 determinations are now working for clients who carry that responsibility instead.

What this means for you in practice

If your client has never issued you a Status Determination Statement

They may now be required to. An SDS is the formal written record of their IR35 determination for your role. If your client has grown through 2023–25 and you've been contracting through your own Ltd on the basis that they're small, it's worth checking whether their status has changed. You can check their most recent filed accounts at Companies House.

If your client issues you an inside determination

You have the right to dispute it. Under the off-payroll working rules, the client must respond within 45 days — either confirming the original decision with reasons, or reversing it. Contractors significantly underuse this process.

If your client issues you an outside determination

Don't treat this as permanent. The determination covers the contract in question and should be reviewed each time your contract renews or your working practices change materially. The Autoclenz principle — established in Autoclenz Ltd v Belcher [2011] UKSC 41 — means tribunals look at the reality of the working relationship, not just what the contract says.

The CEST problem hasn't gone away

Many newly-responsible clients will use HMRC's CEST tool to make their determinations. CEST has known structural limitations — it ignores Mutuality of Obligation entirely, and Freedom of Information data released by HMRC shows it produces an undetermined result in approximately 22% of cases, a figure that has risen consistently since the tool launched.

If your client uses CEST and reaches an inside determination, that's not necessarily the end of the conversation. A contractor who can demonstrate their contract genuinely evidences substitution rights, limited control, and absence of mutual obligation has a defensible position regardless of what CEST says.

The action list

If you want to check how your contract stacks up, the IR35 Verdict contract checker analyses your contract against the same dimensions tribunals use — including Mutuality of Obligation that CEST ignores. Before that, work through these four steps:

1. 1

   Check your client's current size on Companies House — their last filed accounts show turnover and employee count.

2. 2

   Ask for a written SDS if you don't have one — you're entitled to it.

3. 3

   Review your contract against the six key IR35 dimensions, not just personal service and control.

4. 4

   Don't rely solely on CEST for your own assessment.

Frequently asked questions

What is the small company exemption for IR35?

The small company exemption means that if your end client qualifies as a small company — under £10.2 million turnover, under £5.1 million balance sheet, fewer than 50 employees, meeting at least two of three criteria — you as the contractor are responsible for your own IR35 determination rather than the client.

How do I know if my client is now a medium or large company?

Check their most recent filed accounts at Companies House. Look at the turnover and employee figures. If they've crossed two of the three thresholds, they're no longer small for IR35 purposes and should be issuing you a Status Determination Statement.

What is a Status Determination Statement?

An SDS is a written record of your client's IR35 determination for your engagement, along with the reasons for that decision. Medium and large companies are legally required to provide one. You have the right to dispute it if you believe it's incorrect.

Can I challenge an inside IR35 determination?

Yes. Under the off-payroll working rules, you can formally dispute a determination. Your client must respond within 45 days, either confirming the decision with reasons or reversing it. If they fail to respond, the liability shifts back to them.

Does CEST always give the right answer?

No. CEST ignores Mutuality of Obligation — one of the key tests used in employment status case law — and produces an undetermined result in approximately 22% of cases according to FOI-released HMRC data. It's a starting point, not a definitive determination.

Sources and further reading

• —HMRC: Check Employment Status for Tax (CEST)
• —HMRC: Understanding off-payroll working (IR35)
• —HMRC: Status determination statements guidance
• —Companies House: Find company information
• —Autoclenz Ltd v Belcher [2011] UKSC 41
• —ContractorUK: CEST undetermined rate FOI data