THE SIZES THEY ARE A CHANGING
The 6th April 2025 saw new regulation enacted that re-defined the parameters of company size thresholds, affecting both IR35 and company reporting and audit requirements.
WHAT ARE THE SIZES CHANGING FROM AND TO?
There has been no change to the rule that a company must meet two out of three of the company size thresholds to qualify for that size. The changes aim to save companies more than £240m per year according to the Government, as well as simplify processes and ease reporting requirements for companies, as the last adjustment for inflation to the thresholds was in 2013.
Micro:
– Turnover: from not more than £632k to not more than £1m
– Assets: from not more than £316k to not more than £500k
– Employees: an average of 10 (no change).
Small:
– Turnover: from not more than £10.2m to not more than £15m
– Assets: from not more than £5.1m to not more than £7.5m
– Employees: an average of 50 (no change).
Medium:
– Turnover: from not more than £36m to not more than £54m
– Assets: from not more than £18m to not more than £27m
– Employees: an average of 250 (no change).
Large companies are those where two categories are greater than what is defined for medium sized companies.
WHO IS AFFECTED BY THE CHANGES?
Estimates from the Government will result in the following:
- 113,00 companies moving from being classed as small to micro entity
- 14,000 companies moving from being classed as medium sized to small
- 6,000 companies moving from being classed as large to medium sized.
The changes not only affect IR35, but also the reporting and auditing requirements for those moving down a classification, such as having to not have a statutory audit of the annual accounts or producing a directors report.
WHEN DO THE CHANGES TAKE EFFECT?
The threshold changes apply to financial periods starting on or after 6 April 2025.
That said, when determining company size for a financial year that begins on or after 6 April 2025, the rules allow companies to assume that the new thresholds were applicable in the previous financial year. This allows companies to benefit from the new thresholds as soon as possible.
HOW IS IR35 AFFECTED?
Nothing has changed from an actual IR35 legislation point of view, in that two of the small company thresholds still need to apply, and for two consecutive years, to be exempt from the off-payroll requirements. It is just the small company thresholds themselves that have changed.
A company who engages workers must still establish if they are exempt through being classed as a small company. Determining company size is done by reference to the previous financial year end, but applies from the next tax year after the filing period. However, there is a delay between financial periods and being able to apply the criteria in a specific tax year (pre and post these changes), making it far from simple to work out!
ANYTHING ELSE?
Yes. If a company’s first accounting period begins on or after April 6th 2025, what is called ‘transitional provisions’ can apply. This allows a company to be treated in the current year as if it met the relevant size conditions in a previous year – where the new thresholds were used to determine its size.
MY HEAD HURTS. CAN YOU SUM IT UP VERY SIMPLY FOR ME?
Yes we can, and we make a few assumptions in the below example.
The earliest accounting period for a company that was previously classified as medium sized, but who would now be reclassified as a small company, is April 30th 2026. This in turn means the earliest they then are no longer responsible for assessing IR35, is April 6th 2027 (assuming they applied the transitional provisions).