IR35 Status Determination Statements: contractors’ FAQs, answered
Status Determination Statements (SDS) were introduced alongside the highly anticipated reforms to off payroll working, which were due to come into effect on April 6th 2020. However, they were then deferred for 12 months due to the coronavirus pandemic.
Unfortunately, the delay was announced at the 11th hour after many end-hirers had already completed the status assessments and issued the SDS in readiness for the original deadline, writes Joanne Harris, technical commercial manager at Parasol Group.
Is my SDS still valid?
HMRC has confirmed that Status Determination Statements can be issued prior to April 6th 2021 and will be valid after that date, providing they meet the legislative requirements. However, the legislation that introduces the SDS will only come into force on this new April 2021 deadline.
While receiving an SDS from your end-hirer clearly shows the end-hirer’s opinion as to the IR35 status of the assignment, it does not have any force in law until April 6th 2021.
For an SDS to be valid, the client must:
- state in the SDS whether or not the worker would be an employee or office-holder, for tax and National Insurance purposes, if they were directly engaged by the client.
- provide their reasons for coming to that conclusion.
- have taken reasonable care in coming to their conclusion
The SDS must be provided to the contractor and the first party in the supply chain. There is no requirement for this to be signed but the end-hirer will need to retain proof that this was provided to both parties.
Who needs to take reasonable care?
The client must take ‘reasonable care’ when determining whether a worker would have been an employee if they were engaged directly. Where a client fails to take reasonable care, the responsibility for the deduction of tax, NICs and Apprenticeship levy, and paying these to HMRC, will rest solely with them.
Liability will always remain with the client unless it takes reasonable care in reaching its conclusion set out in the SDS. According to HMRC, reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position.
What if an SDS has already been issued?
While the end-hirer is not required to issue an SDS just yet (it remains the contractor’s responsibility to assess the IR35 status of the assignment in the private sector -- pre-April 6th), some of them have, and it would be unwise for contractors to ignore the decision, particularly if it has been prepared using reasonable care.
Until April 6th 2021, it remains your responsibility (as the PSC) to assess the IR35 status of any contracts within the private sector and as such any unpaid tax liability will rest with you. You should always seek professional advice from a specialist who reviews the contract and working practices on your behalf.
If you do receive an SDS ahead of April 6th 2021, this should be considered as part of this status review.
Receiving an inside SDS early may allow you to begin negotiations with your end-hirer. If you have had your contract assessed by a specialist and disagree with the SDS, you will be able to provide evidence as to why. There may also be adjustments that can be made to contracts and working practices that would help strengthen your case for an outside IR35 position.
If the assignment is assessed as inside IR35, you could also use this time to negotiate a new rate and confirm what your gross rate of pay will be. You will need to carefully consider the expenses involved in delivering your services as these will no longer be tax deductible. You should consider the following questions:
- Are they intending to reduce your day rate to account for employer’s national insurance and possibly Apprentice Levy and workplace pension contributions? Will you be happy to continue in the assignment if they take this approach?
- Do you have the option of fixed-term employment with the end-hirer or umbrella employment? Would this offer employment rights and possibly other employment benefits?
It is worth noting that a status assessment now may not be the same as one completed in six months’ time. Working practices and relationships change over time, and IR35 status must be reviewed regularly. It is conceivable that an outside IR35 assignment today could be regarded as ‘inside’ in six months’ time.
Could IR35 reforms be delayed again?
It appears unlikely that the reforms will be delayed again. The government has always been committed to pressing ahead with the changes to the off payroll working rules and it took a global pandemic to stop them being introduced in 2020. Therefore, it would be wise to plan for the changes being implemented in 2021.
It is acceptable for a client to make a determination for a group of workers, providing those workers are engaged under the same contractual terms and conditions?
There are individual ‘in-business’ factors that affect employment status e.g. having other clients, or tendering for other business, so determining a status for groups of workers based on one worker can be risky.
Although post-April 2021 you may receive a preliminary role-based assessment before applying for a role, a full status assessment should be completed once the individual PSC has been selected, taking into account the whole picture. This full assessment should inform the Status Determination Statement.
What if a contractor doesn’t agree with the SDS?
As mentioned above, the contractor and the fee-payer (the party in the supply chain that pays the PSC), has a right to challenge the SDS if they disagree with it through the ‘client-led disagreement process’ – this is also being introduced on April 6th 2021.
As a minimum, the legislation requires the client to:
- Consider the worker’s and/or the deemed employer’s representations. These representations could be made verbally or in writing.
- Respond to the worker and/or the deemed employer’s representations within 45 days beginning on the day the representations are received (not from when the SDS was issued).
- Inform the worker or deemed employer that they have considered their representations and that they have decided that their original SDS was correct and provide reasons, or
- Inform the worker and deemed employer they have considered representations and decided the original conclusion was wrong, then provide a new SDS and state that the previous SDS is withdrawn.
- Take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion
If you disagree with an SDS, you can make written representations explaining why you disagree, and the end hirer has 45 days to respond. If they fail to do so, they retain the responsibility for the deduction of tax, NICs and Apprenticeship Levy.
Although the submission of an SDS won’t be legally required until April 6th 2021, contractors shouldn’t delay in addressing any queries with end hirers. The sooner you address the thorny issue of IR35 status, the better.