In a significant shift for the UK contracting market, the government is set to implement changes to the IR35 tax legislation in April 2025, placing the responsibility for determining employment status back into the hands of contractors. While the changes are aimed at simplifying the contracting landscape, the real impact may vary depending on the size of the business. The most notable effect will be on medium-sized companies, particularly those on the cusp of becoming small businesses, as they may find themselves outside of IR35 regulations if they officially transition to small business status. Estimates suggest that around 14,000 companies could be affected by this reclassification.

A medium or large company in the UK is currently defined by meeting at least two of the following criteria:

• Annual Turnover: More than £10.2 million
• Balance Sheet Total: More than £5.1 million
• Number of Employees: More than 50

However, it is important to note that the specific definitions of small, medium, and large companies under the new IR35 rules have not yet been confirmed by the government. There is speculation that these thresholds might change, particularly to ease the administrative burden on smaller businesses, but no official guidance has been released to date.

For large businesses and genuinely small companies, the IR35 changes may not make a significant difference. Large businesses have long-established processes for dealing with IR35 compliance, while small businesses are already exempt from the off-payroll working rules.

What Are the Changes?

The previous IR35 reforms required businesses to assess whether contractors were genuinely self-employed or effectively working as employees, often leading to conservative assessments and increased costs for both parties. The upcoming changes will now allow contractors to decide their own employment status, potentially reducing administrative burdens and restoring autonomy.

What Does This Mean for Contractors?

For contractors, this change is a double-edged sword. On one hand, they gain back control over their tax affairs, which can lead to increased flexibility and potential tax efficiencies. However, with greater control comes greater responsibility. Contractors will need to ensure they are accurately assessing their status to avoid potential tax liabilities or penalties from HMRC.

Impact on Businesses

Businesses are likely to welcome the reduction in compliance burdens and the removal of risks associated with making incorrect IR35 determinations. However, they may still need to exercise caution when engaging with contractors to avoid disputes and ensure clarity in working arrangements.

Expert Opinions

Tax experts have mixed views on the changes. While many believe this move will simplify the contracting landscape, others caution that the risk of misclassification still exists. Professional advice may be essential for both businesses and contractors to navigate these changes effectively.

Conclusion

The 2025 IR35 speculated changes would mark a return to contractor-led assessments, offering more freedom and potentially boosting the contractor market. However, nothing official has been announced yet, and both businesses and contractors should wait for further details from the government. Remaining vigilant and informed will be key to fully benefiting from the new rules while staying compliant with HMRC guidelines. Whether this change will lead to a more dynamic and flexible workforce remains to be seen, but it undoubtedly signals a shift in the government's approach to off-payroll working.