UK: IR35 in 2025 – New thresholds, HMRC checks, and what they mean for you

published on 17 March 2025 | reading time approx. 4 minutes

In Part 1 of this guide, we explored the fundamentals of IR35, including the key criteria for determining employment status. Now, in Part 2, we’ll dive into the latest developments, focusing on the changes to IR35 rules effective from April 2025. We’ll cover the updated company size thresholds, how group companies are affected, and what to expect during HMRC compliance checks. Let’s take a closer look at what these changes mean for you.

Summary of IR35 rules

IR35 is designed to prevent “disguised employment,” where contractors work like employees but operate through a personal service company (PSC) to pay lower taxes.

If a contractor is deemed to be inside IR35, their income is subject to PAYE tax and National Insurance, just like an employee.
The responsibility for determining IR35 status depends on the size of the hiring company.

Changes Effective from April 2025

The government has increased the financial thresholds for what constitutes a “small” company, meaning more businesses will now qualify as small. The new criteria are:

Turnover: Up to £15 million (previously £10.2 million)
Balance sheet total: Up to £7.5 million (previously £5.1 million)
Number of employees: 50 or fewer (unchanged)

These changes mean that some businesses previously classified as medium-sized will now be small, shifting IR35 responsibility back to contractors in those cases.

IR35 and Group Companies/UK Subsidiaries

In group structures, if the parent company is medium or large, all subsidiaries must apply IR35, even if individually small. The entity receiving the contractor’s services is responsible for determining IR35 status and ensuring compliance.

Who Determines IR35 Status?

Medium and Large Companies: The client is responsible for assessing IR35 status
Small Companies: Contractors working with small businesses remain responsible for determining their own status.

HMRC IR35 Compliance checks

If the client determines that the contractor falls outside IR35, but HMRC disagrees, an enquiry may be launched. HMRC will request details such as:

Justification for the contractor’s IR35 determination.
Breakdown of business income for the relevant tax year.
Copies of written contracts for the period in question.

If the contractor provides sufficient evidence, HMRC will close the enquiry. However, if HMRC still believes IR35 applies, further investigations may follow, including formal meetings and potential reassessments.

HMRC’s Decision and Appeals Process

At the conclusion of an enquiry, HMRC will issue an opinion on whether the contractor has complied with IR35 rules. If the contractor disagrees, they can:

Object to HMRC’s ruling – HMRC will review the reasoning before issuing a final decision.
Appeal to a tax tribunal – Contractors may challenge HMRC’s decision through legal proceedings.

If HMRC determines that IR35 applies, the contractor may need to pay backdated taxes, interest, and, in some cases, penalties for failing to take reasonable care in determining employment status.

Depending on your case, you may also need to pay a penalty – for example, if you failed to take “reasonable care” in determining your employment status. You could also receive a more severe penalty if HMRC finds that you deliberately misled them.

As with any tax investigation, it’s important to seek professional advice as soon as possible – especially if you disagree with HMRC’s verdict.

What next?

With the April 2025 changes affecting company size thresholds, many businesses will need to reassess their classification and obligations under IR35.

Contractors engaging with newly classified small businesses must take responsibility for their IR35 determinations.

Given HMRC’s active compliance measures, ensuring accurate classification and keeping thorough documentation is essential for both businesses and contractors to avoid penalties and disputes.

If you’re unsure how these changes impact you or need support with IR35 compliance, Rödl & Partner’s UK Personal Tax team is here to assist. Reach out to us today for expert guidance tailored to your specific situation.