Entity Setup
Entity Setup Insights: When IR35 & Company Classification Reclassify Your Tax Responsibilities
New thresholds for company size mean more businesses may escape IR35 responsibilities — understand how classification works post-legislation, and what your entity setup should consider.
By NomadicTax Research Team • 5-8 min read • August 27, 2026
## What Has Changed for Company Classification & IR35 Responsibility
Legislation has been introduced to **raise Companies Act thresholds**, which moves many businesses from **medium-sized to small entity status**. ([legislation.gov.uk](https://www.legislation.gov.uk/uksi/2024/1303/pdfs/uksiem_20241303_en_002.pdf?utm_source=openai))
As a result, about **10,000 businesses** will fall outside the off-payroll working rules (IR35) which currently require medium- and large-sized private-sector clients to determine IR35 status for individuals providing services through intermediaries. ([legislation.gov.uk](https://www.legislation.gov.uk/uksi/2024/1303/pdfs/uksiem_20241303_en_002.pdf?utm_source=openai))
This change becomes effective in the financial year **2026/27**, i.e. for engagements on or after **6 April 2026**. ([legislation.gov.uk](https://www.legislation.gov.uk/uksi/2024/1303/pdfs/uksiem_20241303_en_002.pdf?utm_source=openai))
## How IR35 Works & Why Classification Matters
IR35 (off-payroll working rules) requires clients (medium or large private-sector or public sector) to assess employment status and deduct **Income Tax and National Insurance (NI)** when a contractor would be an employee if directly engaged. ([gov.uk](https://www.gov.uk/guidance/off-payroll-working-for-clients?utm_source=openai))
If you are a “small” client, DR rules do not apply and responsibility falls on the contractor’s intermediary. This can shift liability and risk significantly. ([gov.uk](https://www.gov.uk/guidance/off-payroll-working-for-clients?utm_source=openai))
## Practical Impacts for Businesses & Contractors
- **Clients reclassified to ‘small’**: If your company falls below updated thresholds, you no longer need to issue Status Determination Statements (SDS) under IR35 for new engagements starting after the change.
- **Contractors’ role shifts**: If clients outsource assessment, contractors must ensure their intermediaries are handling affairs correctly. Intermediaries often bear responsibility for PAYE/NICs deductions where relevant.
## Examples
- **Example 1:** A private practice with turnover £11 million, assets £6 million, and 60 employees was previously medium-sized. With raised thresholds, it is now small, meaning for new contracts after April 2026, it is no longer responsible for IR35 status determinations. The worker’s intermediary must handle it.
- **Example 2:** Contractor John supplies services to a client in the hospitality sector. If that client no longer qualifies as medium or large, John’s intermediary must determine whether IR35 applies; John must retain evidence of decision and contractual terms.
## Entity Setup Considerations
- Consider **contract structure**: when intermediaries need to take more responsibility, ensure contracts reflect true working arrangements and risk is appropriately managed.
- For clients, evaluate your **size classification** under updated Companies Act rules. If near threshold, plan ahead for which engagements might shift liability.
- For contractors, maintain proper documentation (contracts, status determinations, payment records). Use professional advice where needed.
## Conclusion
The changes to entity classification move liability away from many clients and back onto intermediaries. This affects how businesses structure engagements and contracts. For both clients and contractors, clarity, correct documentation, and up-to-date classification are essential to avoid unexpected tax and NIC liabilities.