August update brings a major overhaul to the process by which clients determine the employment status of contractors
In August 2024 HMRC made significant updates to the off-payroll working rules, to enhance compliance and simplify the administration of these rules for both contractors and clients.
The latest update represents a pivotal shift in how off-payroll working is regulated, and it is crucial for all parties involved to understand these modifications to ensure they are operating within the legal framework.
Overview of off-payroll working rules
Off-payroll working rules were introduced to address the issue of tax avoidance through the use of personal service companies (PSCs). If a contractor would be considered an employee if hired directly, but is instead working through a PSC, the rules ensure that the contractor pays the same tax and National Insurance contributions as if they were an employee.
Initially, the off-payroll working rules applied to the public sector from April 2017 and were extended to the private sector in April 2021. The key aspect of these rules is determining the employment status of contractors, which influences the tax obligations.
Key changes in August 2024
1. Simplified status determination process
The August 2024 update brings a major overhaul to the process by which clients determine the employment status of contractors. The new guidance introduces a more streamlined status determination statement (SDS) requirement. This statement must be provided to the contractor at the outset of the engagement and must include clear reasoning for the determination. The update aims to reduce disputes and ensure that contractors are given more transparent information regarding their status. To further simplify the process, a new digital tool has been introduced to assist clients in assessing a contractor’s employment status.
2. Revised rules for small businesses
Small businesses have been given more freedom under the new rules. Previously, small businesses were exempt from the off-payroll working rules, but the August update introduces a simplified version of the rules tailored for these entities. The new provisions are designed to be less onerous for small businesses while still ensuring compliance. This clarification should ease the administrative challenges faced by smaller businesses.
3. Simplified test
HMRC guidance summarises that a simplified test applies to some clients who are not:
In this case, a business must apply the rules if they have an annual turnover of more than £10.2m for the last calendar year. This condition is determined on an annual basis and is applicable from the start of the tax year following the end of the calendar in which the turnover exceeded £10.2m. For companies in a group, to determine the size you need to include all the figures from the group companies.
4. Enhanced dispute resolution mechanism
Recognising the potential for disputes over employment status determinations, the update includes an improved dispute resolution mechanism. This new process allows for a more structured approach to resolving disagreements between contractors and clients regarding status determinations. It provides clearer guidelines on how disputes should be handled and escalated, aiming to reduce the likelihood of lengthy and costly disputes.
Further resources
Read ACCA's technical factsheets Treatment of off-payroll arrangements – IR35 summary and Accounting and tax treatment of IR 35 deductions in the public sector.