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.”
Switching accountability
Chaplin mentioned contractors also needs to pay attention to the truth that the modifications made to the Firms Act 2006 could have little impression on their working preparations for at the very least two years. It is because the earliest a medium firm can qualify as small the place their IR35 obligations are involved is 6 April 2027, as confirmed by an replace to the HMRC Employment Standing Handbook on 8 April 2025.
“[And] let’s be clear: the variety of contractors that this may occasionally profit is minimal and the basic challenges with IR35 stay, persevering with to impede the pliability of Britain’s unbiased workforce,” he mentioned.
“The off-payroll guidelines proceed to power contractors into suboptimal quasi-employment fashions and place an pointless burden on UK enterprises. If Labour needs significant change that produces progress, they should tackle IR35 itself, not simply regulate reporting thresholds.”
Even so, Seb Maley, CEO of contractor insurance coverage firm Qdos, mentioned there might be contractors on the market who might be disillusioned by the point lag between the modifications being launched and taking impact from an IR35 perspective.
“It’s going to really feel like one step ahead two steps again for freelancers and contractors engaged by these medium-sized companies which are set to be relieved of the off-payroll guidelines,” he mentioned.
“There was hope this transformation would kick in in a single day, however a authorities [Employment Status Manual] replace has revealed the satan within the element,” mentioned Maley. “It exhibits that we’re nonetheless two years away from these freelancers being transferred again the accountability for figuring out IR35 standing – successfully, assessing in the event that they pay tax as a self-employed employee or worker.”
Within the interim, all contractors can do, he mentioned, is sit tight and permit their purchasers to proceed feeling the executive burden of IR35.
“That being mentioned, if a freelancer’s involved their consumer has misapplied their IR35 standing, they’re nicely inside their proper to hunt a second opinion, which can be utilized to problem this dedication,” mentioned Maley.
