Charities and Public Sector Bodies
Charities are treated differently. A charity qualifies as small using the same three tests, but with one key difference: if the charity is part of a group, you only test the individual charity, not the whole group.
This means a small charity that's part of a large charitable group can still benefit from the exemption. The group aggregation rules that apply to commercial companies don't apply to charities.
Public sector bodies—government departments, NHS trusts, local councils—never qualify for the small company exemption. The public sector has been subject to IR35 status determination since 2017, and nothing exempts them.
What Happens When the Exemption Applies
When you're contracting for a qualifying small company, you're back to pre-2021 rules. The client doesn't assess your status, doesn't issue a Status Determination Statement, and doesn't take on any liability.
You invoice the client. They pay your limited company. You decide whether you're inside or outside IR35 based on your actual working arrangements. You pay tax accordingly.
If you believe you're outside IR35, you can take income as dividends after paying corporation tax. If you're inside, you run everything through payroll as deemed employment income.
The client has no obligation to challenge your assessment. They're paying a limited company for services—what happens after that is between you and the tax authorities.
What Happens When It Doesn't Apply
When your client isn't a small company, they must assess your IR35 status and give you a Status Determination Statement before you start work.
That determination is binding. If they say you're inside IR35, you're inside for tax purposes regardless of what you think your actual working arrangements suggest. You can challenge it through their internal process, but unless they change the determination, you're stuck with it.
The client then becomes liable for employment taxes if their determination was wrong. This is why many large companies default to blanket inside determinations—it's safer for them even if it costs you money.
The Grey Area: Companies Near the Thresholds
Some companies sit right on the edge of the small company thresholds. Their turnover fluctuates around £10 million. Their employee count hovers at 48-52 depending on the month.
These companies often struggle with certainty. They might legitimately believe they qualify one year and not the next. And because the exemption requires two consecutive years before status changes, there's a transition period where things aren't clear.
If you're contracting for a company near the thresholds, clarify the situation at the start of each contract year. Don't assume last year's status still applies. Get written confirmation of their current position.
Verifying Small Company Claims
Some contractors take clients at their word when they claim small company status. That's risky.
If a client incorrectly claims to be a small company when they're not, and you operate outside IR35 on that basis, things get complicated if the authorities come calling. The client should have been assessing status and potentially operating you inside IR35. You've been paying tax as though you're outside.
While the primary liability might sit with the client for failing to apply the rules, you could still face questions about why you didn't properly verify their status.
Simple due diligence: check their latest accounts at Companies House. Look at turnover, look at employee numbers, check for parent companies. It takes ten minutes and could save you years of hassle.
When Clients Get It Wrong
Companies do sometimes get their small company status wrong. Usually it's honest mistakes—they didn't realize group aggregation applied, or they miscounted employees, or they thought balance sheet total meant something different.
If you discover mid-contract that your client doesn't actually qualify for the exemption, status needs reassessing. Technically, they should have been operating the full rules from day one.
In practice, this usually means stopping work until they've properly assessed your status and issued a Status Determination Statement. You can't just carry on under the old arrangement once you know it doesn't apply.
The Practical Reality for Contractors
The small company exemption is valuable if you can genuinely operate outside IR35. These clients typically won't force you inside with blanket determinations because they're not making determinations at all.
But it's not a free pass. You carry all the risk. If your working arrangements are genuinely inside IR35—you work under client supervision, you can't send a substitute, you're integrated into their team—operating outside because the client's small doesn't make it legal.
Many contractors prefer working with small companies precisely because they avoid the blanket inside determinations that larger companies make. But that freedom comes with personal liability.
Limited Company Clients
If your client is itself a limited company contractor—another one-person consultancy, for example—they almost certainly qualify as small. Annual turnover under £10.2 million? Obviously. Fewer than 50 employees? Definitely—it's just them.
This is common in contracting chains where prime contractors subcontract work to others. As long as the prime isn't part of a larger group, the small company exemption typically applies.
Planning Around Small Company Status
Some contractors actively seek out small company clients specifically to avoid IR35 determinations. It's a legitimate strategy if your working practices genuinely support outside IR35 status.
But don't choose clients based solely on their size. A poorly structured contract with a small company still puts you inside IR35 with full personal liability. A well-structured arrangement with a large company that properly assesses you as outside is often safer.
The exemption creates opportunity, not protection.
Documentation Still Matters
Just because a small company client isn't assessing your status doesn't mean you shouldn't document your position properly.
Keep your contracts clear about control, substitution rights, and financial risk. Document how you actually work—your flexibility over hours and location, your ability to decline work, your multiple client relationships.
If the tax authorities question your status in three years' time, you'll need evidence that your working arrangements supported your outside IR35 position. The fact your client was small doesn't change that.
When to Get Professional Advice
If you're contracting for a company claiming small company status, consider paying for contract review anyway. A specialist looking at your contract and working arrangements can confirm whether you're genuinely outside IR35.
Yes, you're making the determination yourself and the client isn't requiring it. But wouldn't you rather know now if there's a problem, rather than discover it during an investigation three years later?
Budget £300-500 for a proper contract and working practices review. It's insurance that actually pays out.
The small company exemption matters if you're contracting in the private sector. It determines whether you assess your own IR35 status or whether the client does.
Companies qualify as small by meeting two of three tests: turnover under £10.2 million, balance sheet under £5.1 million, or fewer than 50 employees. Groups count as one entity, so check parent company status carefully.
When the exemption applies, you determine your own status and carry all the liability. When it doesn't, the client assesses you and they're liable for getting it wrong.
Verify your client's status properly. Don't just take their word for it. Check their accounts, look for parent companies, confirm group structure. Ten minutes of due diligence now beats years of problems later.
And regardless of client size,
if your working arrangements put you inside IR35, operate inside IR35. The exemption doesn't change what's legal—it only changes who makes the determination.
