HMRC predicts IR35-related £20m annual tax loss because of enterprise measurement classification modifications

A rejig of the federal government rules used to categorise firm sizes will price the Treasury round £20m in misplaced tax every year because of IR35 non-compliance, in keeping with a freedom of knowledge (FOI) response from HM Income & Customs (HMRC).

The UK authorities launched modifications on 6 April 2025 that elevated the steadiness sheet and turnover thresholds used to find out whether or not corporations must be categorized as micro, small or medium-sized companies, as per the phrases of the Firms Act 2006.

Beneath the reworked standards, an organization might be categorized as a small enterprise if they’ve an mixture turnover of £15m or much less and a steadiness sheet whole of underneath £7.5m.

Beforehand, to qualify as a small enterprise, an organization would wish a turnover of lower than £10.2m and a steadiness sheet of £9m or much less.  

Authorities figures recommend the modifications will end in 10,000 medium-sized companies falling out of scope of the non-public sector IR35 off-payroll reforms, because of them being reclassified as small companies.

The reforms, which got here into power in April 2021, made medium-to-large corporations liable for figuring out if the contractors they have interaction must be taxed in the identical approach as off-payroll staff (exterior IR35) or in the identical approach as salaried employees (inside IR35).

Earlier than the non-public sector reforms got here into power, contractors have been liable for figuring out whether or not or not the work they did and the way it was carried out meant their engagements must be categorized as inside or exterior IR35.

In accordance with the federal government’s personal figures, the change in enterprise measurement classifications appears to be like set to impression 20,000 contractors who’re engaged by medium-to-large companies.

Nevertheless, Pc Weekly has seen HMRC’s response to an FOI request, submitted by Dave Chaplin, CEO of IR35 compliance firm IR35 Protect, which suggests the modifications could have a detrimental impression on the Treasury’s IR35-related tax take.

The doc states that HMRC produced an estimate that means the modifications to firm measurement turnover and steadiness sheet thresholds will price the Exchequer £20m every year because of contractors affected by the modifications failing to adjust to the IR35 guidelines.

“It’s estimated that round 1.5%, or between 2,000-to-2,500 of all people throughout the off-payroll working guidelines and dealing for medium- or large-sized companies will change employment preparations and revert to non-compliance with the IR35 guidelines because of the definition change,” mentioned HMRC in its FOI response.

“It’s estimated they may pay within the area of £10,000 much less in tax per yr because of this, making a complete lack of income of round £20m in tax liabilities per yr. There isn’t any price related to regular, compliant behaviour, since contractors already paying right taxes would have been unaffected by off-payroll reform and don’t contribute to the extra income it continues to gather.”

Chatting with Pc Weekly, Chaplin mentioned that whereas HMRC expects that 20,000 contractors might be affected by the modifications, this could not end in any distinction within the quantity of taxes paid to the Treasury.

“It’s vital to notice that simply because the tax legal responsibility shifts to the contractor that doesn’t give the contractor a license to disregard the unique laws, which is able to nonetheless be in power,” warned Chaplin. “All that modifications is that the tax legal responsibility switches again from the consumer to the contractor, therefore no change in taxes paid.”