Absolutely. We worked for a PC which was a one man band once - he just contracted literally all of the works out. As long as they can fulfil their duties under CDM then they are fine. Having said that, I know the one man PC did struggle as there was a lot to do for one person, but with the right advice and guidance (which it sounds like yours has in the form of the external H&S bod) there is no reason someone who employs less than 5 people could be a Principal Contractor.

Is this now, or in three months time? In future it's going to happen a lot - my extension was built by a builder who had three employees and subcontracted plastering, plumbing, electrics and painting. Later this year, he'll be principal contractor for nearly everything he does.