IR35 status disagreement process: off-payroll explainer for April 2021
Something else opaque on the ‘to-do’ list of all large and medium-sized organisations ahead of private sector IR35 reform from April 2021, aside to the Status Determination Statement, is the Disagreement Process, writes David Harmer, associate director of contractor solutions at Markel Tax.
The disagreement process: in a nutshell
Under this incoming off-payroll worker legislation, the end-client must implement its own “disagreement” process to allow the contractor to raise any objections to the Status Determination Statement (‘SDS’).
Unhelpfully, the legislation does not provide prescriptive steps on what the disagreement process should look like. Instead, HMRC guidance simply says that the end-client should consider the challenge and provide a ‘reasoned response.’
However, the 2021 legislation does impose a 45-day time limit for the end-client to respond to the contractor’s challenge. Helpfully, HMRC has confirmed that the 45 days starts from the first notification of the contractor’s written disagreement.
Having reviewed a contractor’s disagreement with the decision, the end-client must then either: confirm its existing decision along with its reasoning, or issue a new SDS along with its updated reasoning. If a new SDS is produced, then it must be delivered to the relevant parties, as we outlined previously to ContractorUK readers.
The 45-day time period is of significant importance as the legislation effectively provides that if the end-client does not provide a response within this 45-day limit, then it assumes the position of “fee-payer.” The legislation does not contemplate delays or any other circumstances it simply states: “You are a Fee-Payer if you do not respond within 45 days.”
A recruitment agency which is also the deemed employer can similarly challenge the SDS, and the same process has to be followed. Interestingly, the legislation specifically defines the “deemed employer” (not simply the fee-payer) as the party which has the right to disagree with the client’s IR35 status determination. This suggests that it is only ‘caught’ decisions (also known as ‘inside IR35’ decisions) which the agency can disagree with, because they are not a deemed employer for a contract outside IR35. HMRC confirms this at: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10015
Practicalities of the disagreement process
In the run-up to April 2020 (the originally intended implementation date of the new off-payroll legislation), we had a large number of contractors contact us for help because the end-client business had asked them to lodge any disagreements with the SDS decision. There was one significant problem with this, which remains a problem in the run-up to April 2021.
While HMRC have confirmed that an SDS produced prior to April 6th 2021 will be valid, come April 6th 2021 (for engagements which started prior to this date), a disagreement process which has concluded prior to April 6th 2021 does not dispose of an end-client’s obligation to respond to a disagreement made after April 6th 2021!
Lawful disagreement systems can’t be live until after April 6th next year
This is because the legislation underpinning this process has not been active at the point at which a disagreement was lodged. So the exercise may have to be repeated for any SDSs produced prior to April 6th 2021 because a legislatively-compliant disagreement process cannot be initiated until April 6th 2021. This fact will have serious practical implications for end-clients, as they could find themselves with a deluge of challenges come April 6th 2021 to which they only have 45 days to respond.
This is another reason why it is of paramount importance that end-clients adequately deal with the legislation and ensure a contractor fully understands the decision which has been given. We would advise all end-clients to undertake ‘due diligence’ and assessments prior to April 6th 2021, but we would also advise they keep in mind the practicalities of dealing with any disagreements.
In terms of a rule of thumb for now though, there is no hard-and-fast rule for how end-clients should deal with disagreement process or the timing issues highlighted above. In our experience, some clients will prefer to enter into discussion with their contractors well in advance, in order to minimise the impact of the disagreement process come April 6th 2021. Other end-users may prefer to wait until April 6th, or just before, to issue the formal SDS in the hope that by acting in such a way, it should mean that all ‘disagreements’ won’t be received on the same day and they will be able to manage staggered responses.
How does a contractor (or agency) ‘disagree’ with the client’s IR35 status decision?
As is seemingly the theme, there is no prescribed format from HMRC for how a contractor should raise a disagreement. Simply, the worker has a legislative right to disagree with the SDS and the end-client must provide a response to that disagreement.
First and foremost, we would encourage every contractor to understand what we have outlined so far; i.e. what the SDS must contain, when the formal disagreement process actually comes into force, and the time limit placed on the end-client.
We would also strongly encourage contractors to provide something a little more detailed than:
“I disagree with the SDS I think I should be outside IR35.”
Our best-practice advice to contractors in providing their disagreement is to follow the same format as a well laid-out and complaint SDS, along the lines of:
1. Clear statement
At the top of the document it should clearly state that you disagree with the SDS and what you think the correct decision should be. For example:
“I wish to initiate the formal disagreement process for the SDS issued to me on the date ‘XX/XX/XX.’ I conclude my engagement is outside of IR35.”
2. Clear explanation – but stick to the facts and fundamentals
Give an explanation of what areas you disagree with and why. This should be focused on facts which may have been missed in the contract or working practices, and how they relate to IR35.
It is important that the explanation relates to the fundamentals of IR35; i.e. Right of Substitution, Right of Control, and Mutuality of Obligation. Of course, it may be that further clarification can be given on one of these areas.
While we would also encourage contractors to provide additional information on their ‘in business on their own account’ set up, these are less significant factors. Therefore, it is unlikely an SDS would change simply because the end-client didn’t notice that you have your own website or computer equipment.
Above all, stick to the facts. It may be frustrating (especially if an end-client has taken a broad brush approach), but it is important to stay level-headed and give reasoned opinions based on the facts of the contractual clauses and working practices. The end-client must provide a ‘reasoned response’ to this submission, remember, demonstrating that they have considered your points. So be careful -- you don’t want to bury any important information in lengthy arguments.
Coming up next…
In the third and final instalment of this series, we’ll conclude with some recommended questions that contractors and their contractual partners ought to ask, to ensure both the SDS and Disagreement Process run as smoothly as possible. We’ll also stand back from the nitty gritty to clarify a key term we’ve bandied about and, perhaps most importantly, confirm who’s going to be liable to HMRC and in what circumstances.