Where a client qualifies as ‘small’ for the purposes of the off-payroll working rules, Chapter 10 will generally not apply.
Instead, the engagement remains subject to the original IR35 rules (Chapter 8), and the contractor’s intermediary – typically their personal service company (PSC) – is responsible for determining whether IR35 applies.
For public authorities and medium and large non-public sector clients, Chapter 10 generally applies, and the client is responsible for determining the contractor’s employment status for tax.
It is one of the most important parts of the off-payroll framework, because it decides who is responsible for making the employment status decision.
Where Chapter 10 applies, the client must assess a contractor’s status, take reasonable care over the decision and issue a Status Determination Statement (SDS).
If the client qualifies as small, the contractor’s intermediary remains responsible under the original IR35 rules.
The small-client exclusion applies to non-public sector clients, including qualifying private and voluntary sector organisations. Separate rules apply to some non-corporate organisations, groups and overseas clients.
What is a ‘small company’?
For financial years beginning on or after 6 April 2025, a company qualifies as small under the Companies Act size criteria if it meets at least two of the following conditions:
- annual turnover of not more than £15 million
- balance sheet total of not more than £7.5 million
- no more than 50 employees on average
These thresholds increased from £10.2 million turnover and £5.1 million balance sheet total for financial years beginning on or after 6 April 2025. The employee threshold remained unchanged.
However, the new thresholds do not immediately change a client’s size for off-payroll purposes. Chapter 10 uses rules based on the relevant financial years and when the accounts-filing period ends. For a company with a usual 12-month financial year, HMRC says the new thresholds can affect its off-payroll status as early as the 2027/28 tax year.
For an established corporate entity, a change between small and medium/large status will normally require the relevant size conditions to be met for two consecutive financial years. Special rules apply to newly incorporated companies and some other entities.
The thresholds were updated in April 2025. HMRC also explains the transitional rules in its Employment Status Manual.
When the exemption applies
The small-client exclusion applies to non-public sector clients. All public authorities fall within the scope of Chapter 10, regardless of size.
If the client qualifies as small:
- Chapter 10 does not apply to the engagement
- the client does not have to make the Chapter 10 status determination or issue an SDS
- the contractor’s intermediary remains responsible for considering whether Chapter 8 IR35 applies
- the intermediary is responsible for accounting for any resulting tax and National Insurance liability
There are also special rules for overseas clients. Broadly, where a client is wholly overseas and has no UK connection, Chapter 10 does not apply, and responsibility can remain with the contractor’s intermediary under Chapter 8.
Changes in a corporate client’s size do not necessarily affect Chapter 10 immediately. The legislation includes timing rules that determine the tax year from which a change in size takes effect.
You can read HMRC’s approach to the rules here: GOV.UK – Client responsibilities.
How do clients declare their size?
Clients do not have to proactively confirm their size to every contractor.
However, if a worker or the person the client contracts with is uncertain about the client’s size, they can make a formal written request for confirmation under the off-payroll working rules.
The request should make clear that confirmation is being sought for the purposes of Chapters 8 and 10 and identify the tax year concerned.
The client generally has 45 days to respond to a valid request and confirm whether it is small or medium/large for the relevant tax year.
This gives contractors and other parties in the contractual chain evidence of whether Chapter 8 or Chapter 10 applies. HMRC sets out the formal request procedure in ESM10011A.
If you want to check who is responsible once the client’s size and structure are known, use our IR35 Responsibility Checker.
Group structures and connected companies
Special rules apply where a company is part of a group.
When determining whether a group’s parent is small, the figures of the companies within the group are taken into account. If the parent is medium or large for the purposes of the rules, its subsidiaries will also be treated as medium or large.
This prevents a large group from avoiding Chapter 10 simply by engaging contractors through a small subsidiary.
Separate rules also apply to certain connected entities.
HMRC’s guidance on group, connected-company and size tests is included here: GOV.UK – Small sized companies.
Non-corporate clients
The small-client rules also apply to some non-corporate clients, such as partnerships, unincorporated organisations and individuals carrying on a trade.
Different size tests apply in these cases. Unlike the corporate test, these rules generally use turnover rather than the three Companies Act measures, and the relevant reference period depends on the client type.
Unincorporated clients should therefore check the specific tests in HMRC’s off-payroll guidance.
What the exemption means for contractors
If the client qualifies as small, the contractor’s intermediary – usually their PSC – must:
- determine whether the engagement falls inside or outside IR35 under Chapter 8
- keep appropriate evidence relating to the contractual terms and working arrangements
- be prepared to justify the treatment if HMRC opens an IR35 enquiry
- account for any tax and National Insurance due if the engagement falls within IR35
This is broadly the same framework that applied to contractors before the off-payroll reforms transferred responsibility to clients for engagements within Chapter 10.
For many contractors, checking whether the client is small is therefore the first step in understanding who is responsible for IR35 compliance on the engagement.
Why the exemption exists
The exemption was introduced to protect smaller organisations from the administrative burden of operating the Off-Payroll rules.
Status assessments, dispute processes, and PAYE deductions can require significant internal resources that small organisations may not have.
By keeping engagements with small non-public sector clients outside Chapter 10, the rules leave the original Chapter 8 responsibilities with the contractor’s intermediary.
Practical steps for contractors and agencies
Before you start a new engagement, it is always prudent to confirm with your agent (or client):
- whether the client qualifies as small
- which Chapter applies (8 or 10)
- who is responsible for making the IR35 decision
- whether an SDS will be issued
Contractors may also want to keep written confirmation of the client’s size for their own IR35 records. This does not prove the engagement is outside IR35, but it can provide important evidence that responsibility for considering IR35 rests with the contractor’s intermediary under Chapter 8 rather than with the client under Chapter 10.