‘What is SDS?’ The text message that exposes those IT contractor recruiters letting us all down on off-payroll

There’s a Status Determination Statement LinkedIn post by a clearly seasoned IT contractor which I’d urge everyone in the contracting industry to check out, especially agencies, because it unfortunately yet succinctly captures a key IR35 failing from the recruitment industry which, as a recruiter, I’m a little ashamed to say is still ongoing, writes Matt Collingwood, of IT staffing firm VIQU.

The text message post that tells a thousand words

Before I continue, please be aware that I’m aware the LinkedIn post is not representative of the entire UK staffing industry. But it shows, notably in a single nine-letter SMS query -- ‘What is SDS? -- the key mistake many agents make with the Off-Payroll Working (OPW) rules.  

I know what you’re likely thinking. The IR35 legislation has been around for 20-plus years and the latest changes to the legislation were made over two years ago. So how can us recruitment agents still be failing contractors and clients?

Unfortunately, the sad reality with IR35 is that recruitment is broken. I’m sure I’ll get many fellow agents trying to tell me otherwise in none-too-polite terms! But it’s true. And here’s how it comes about. 

Why IR35 /Off-Payroll is getting compromised

There is very strong focus on sales and revenue-generation among recruiters right now, and it’s so strong that it means legislative compliance and the transfer of key skills to new agents, so they operate with a sound knowledge of compliance, just doesn’t get prioritised. Compounding the situation, the recruitment industry is known for poor retention, and the number of trainees who leave recruitment within one year of joining is high. Fearful of this churn rate (roughly 66% in year one), recruitment agencies choose to focus mostly on sales training, often at the expense of establishing their agents’ knowledge of compliance, and skimming over core, internal, legislative processes. The result? Important frameworks like IR35 and OPW just get compromised.  

The paradox for agencies

This filters down to negatively impact contractors and clients. But by focusing on number one only, agencies are paradoxically storing up a potential liability for themselves.

Indeed, it seems there’s hardly a month that goes by without both an umbrella company and the recruitment company at an employment tribunal together. Although such cases are mostly primarily concerned with The Conduct of Employment Agencies and Employment Businesses Regulations 2003, many feature payment issues, contractors forced on-payroll, and/or the recruitment company’s processes being found wanting. 

Did you hear the one about the agent whose command of IR35 is embarrassing?

In one tribunal case, I spoke with someone who attended the hearing. During the proceedings, the recruiter was called as a witness by the respondent, and when questioned by the solicitor for the claimant, the recruiter’s lack of knowledge was “embarrassing”. As a result, my in-attendance-source also told me, the judge “rightfully” ripped the recruiter apart.  

Let’s return to the subject of the LinkedIn post -- Status Determination Statements and the agent for a “leading recruitment agency” simply not knowing what an SDS is.

My recommendation is that we all think of an SDS a bit like we do an annual MOT test. It’s a full inspection process which, if carried out properly, will deliver a final result, potentially even granting peace of mind. Instead, though, of a ‘pass’ or ‘fail’ like your car receives, the SDS deems a contract to be ‘Inside IR35’ or ‘Outside IR35.’  

Status Determination Statements (cont.)

Further like an MOT, an SDS isn’t a nice-to-have. It is a legal requirement for every client looking to secure the services of a contractor.

In fact, with Chapter 10, ITEPA, HMRC makes clear: “That liability will always remain with the client unless it takes reasonable care in reaching its conclusion set out in the SDS.”

And Employment Status Manual 10014 adds: “HMRC expects each client to carry out a complete and thorough determination and preserve sufficient records to show how the decision was reached.”  

SDS and contractors

Unfortunately and maybe HMRC doesn’t know this, but some end-clients interpret an SDS as something that will help them establish that a contractor should be ‘Inside IR35.’ But clients actually have an equal responsibility to use reasonable care if a contract is ‘Outside IR35’ too. 

Worryingly, there is in mid-2023 a lack of education within some businesses in respect to these key areas of off-payroll rules compliance.

Therefore, you -- the contractor -- need to be aware of:

1. what your rights are with an SDS; and
2. whether your rights in and around the SDS process are being upheld; and
3. what your agency/client ‘should’ be doing with a SDS/OPW; and finally;
4. what your agency is doing with SDS/OPW. 

What else contractors must do when faced with OPW ignorance  

If you’re unhappy with an IR35 status determination, or you’re not even able to secure the SDS, my major piece of advice is this -- put the onus on the recruitment agency.

Create accountability within that agency! Remember though, it’s not your job to educate an agency and its recruiters -- there are enough webinars, knowledge-sharing opportunities and networking groups to dedicated to IR35 reform and OPW to do that. Yet be aware it’s a distinct possibility if you’re feeling that you need to educate your agency -- as the LinkedIn poster did (“As an agency, you really should be aware of” SDS), that the agency is just being lazy. Or perhaps it cannot be bothered to act in your interests. Sorry agents, this is another unpopular truth which isn't being said enough!

Contractors remember -- you are completely within your rights to call out a recruiter if they are acting with bad practice on the IR35 front. So my business and I welcome LinkedIn posts like the one which inspired this article. Reassuringly, some 3,600-plus people ‘like’ the post too.

Put it this way. Should I be in a contractor’s shoes, I’d be looking for self-preservation through knowledge. I’d want to understand the revised IR35 legislation (introduced on April 6th 2017 in the public sector and April 6th 2021 in the private sector) thoroughly, so that I could tell early on in a conversation with an agent whether or not they truly understand IR35 and the OPW rules.  

What recruitment agencies must do to get on top of IR35 compliance

To my fellow recruitment agencies -- you need to get your act together on all things status!

IR35 of 2000 and the OPW rules of 2017/21 aren’t going anywhere and the legislation isn’t a new anomaly, so there’s no excuse for a lack of compliance awareness or know-how.

Maybe your agency should take a leaf out of our book. Our staffing biz holds regular training sessions for our consultants dedicated to compliance, and then we look to assess our recruiters on their legislative knowledge. If that’s not something of interest to your employment business, then at least do what some agencies rightly do -- consult professional third-parties clued up on IR35, such as accountants, status specialists or IR35 contract review firms. Agencies which do this are acting to ensure they are doing their compliance job properly and doing best by their contractors.  

When we blew the IR35 whistle on Human Resources

Sometimes HR can be an obstacle. We placed a contractor with an NHS trust, which pleasingly followed a legitimate SDS process (using CEST), and determined the contractor was working ‘Outside IR35.’

The contractor started on-site, but then HR got involved and told us the contract was in fact ‘Inside IR35’. HR had completed a new SDS -- driven by the outcome that they wanted -- not by the questions which the SDS was asking.

Unfortunately, we ended up having to report the issue to a senior figure within the NHS trust. We did this out of ethics, but aware of the risk that the trust would never work with us again. Ominously, I don’t think many agencies would take as hard a line as we did – at least not based on the accounts from contractors I’m hearing. Agencies wrongly choose profit over compliance, sadly for the reasons outlined earlier on. 

Profit, problem, plea…

And don’t underestimate the strength of profit. In fact, I’m seeing more and more agencies which were traditionally only permanent-focused, now turning their hand to contract recruitment. The reason for this shift is simple -- contract tends to make more money overall, and puts a high multiplier on the business.  

The problem is this. Businesses are opening contract divisions and desks with individuals who often don’t have enough knowledge of the compliance involved in contracting. My advice to any recruitment agency which will listen is this -- take accountability and educate your staff on compliance’s risk, responsibilities and rewards. If you’re not going to take the legislative side of contracting seriously, please simply take yourself out of the game and limit your liability, for the good of your own business, for the good of our industry and for the good of our economy.