When contractors’ clients dispute IR35 status: how to handle a shock inside IR35 determination

As a contractor, even though the determination may be out of your hands, navigating the world of the updated Off-Payroll / IR35 rules can still feel complex and contentious.

Often, we hear from contractors who’ve embarked on a new contract, pleased that the client has determined them to be outside IR35; a favourable position to be in, writes Charlie Hemsworth, a director of status advisory Bauer & Cottrell.

But while contractors might start the assignment with a clear outside IR35 determination, there’s always the possibility that the client might change their mind midway through the engagement. 

This shock inside IR35 determination could occur for a number of reasons, ranging from a shift in the client’s risk perspective and simple second thoughts, to influences and questions from other parties such as the recruitment agency or even HMRC. 

So let’s assume you turn up to the client site tomorrow or log on from home to resume your services and find an inside IR35 Status Determination Statement (SDS) in your inbox.

Here are seven steps to take if your client is turning your engagement from outside IR35 to inside IR35 (and you’re not happy about it):

1. Establish what has prompted the IR35 status change

Have your working practices changed? Has this been prompted by third-party involvement, e.g. an HMRC audit, or have they received independent advice that has brought your determination into question?

Or, are they simply nervous and now making blanket determinations?

Speak to your client or agency to understand their position and establish if there is scope to reconsider or address their concerns.

2. Review the original inside IR35 determination

Revisit your initial IR35 determination to assess its accuracy based on your current working practices and contractual terms.

If you believe the determination was incorrect initially or if circumstances have changed significantly, you may have no choice but to accept the inside IR35 determination.

3. Ensure you obtain the new SDS in full

If you haven't received the new SDS and haven't resolved the dispute through discussions, request the formal SDS from your client, which should include their reasoning behind the change. The full SDS will also be the avenue for appealing if you need to (see points 4, 6, 7). 

4. Consider seeking specialist advice

If you disagree with the new SDS, have your contract and working practices independently reviewed by an IR35 expert to confirm if the client has made the correct determination and done so with “reasonable care.” An experienced IR35 expert should also be able to advise you on your rights and best course of action, and even help you with an appeal if required.

5. Gather your evidence

Collate records of all communications, assessments, contractual terms, independent opinions and evidence that supports your original outside IR35 determination.

For example, project plans or documents that show autonomy and a lack of supervision, direction or control over your work, are especially useful.

6. Exercise your right to appeal

You will need to clearly set out why you disagree with the client’s reasoning in the new SDS, and provide evidence to support your representations. 

If needed, engage a specialist to assist you with structuring your appeal to stand the greatest chance of success.

7. Know the appeal outcome deadline

The client must respond to your appeal within 45 calendar days of receiving it, either confirming a successful appeal, or that they are standing by their decision. 

What if a contractor SDS appeal of an inside IR35 decision is unsuccessful?

If the client decides to stand by their inside IR35 determination after an appeal, there is no further legal route to change it. 

You might consider re-negotiating your rate of pay, or potentially even reclaiming overpaid tax through self-assessment -- though this can be complex. 

Crucially, you should establish with your client whether the new determination (inside IR35) applies moving forward, or if it applies retrospectively. The client’s decision could be dependent on the circumstances leading to the change in status, and you should review any relevant terms outlined in your contract.

Finally, evaluate whether the relationship with the client remains viable. Could it be time to move on?

Seven steps to kickback an inside IR35 SDS can help you, but…

While the current landscape of limited company contracting means the IR35 decision is out of your hands in most cases, be cautious with just taking your client or agency’s word for it when your IR35 status gets changed..

These seven steps to take once you’ve received an inside IR35 determination in a Status Determination Statement should help.

But ultimately, prevention is better than cure. That’s why ContractorUK will soon publish our recommended and proactive measures which outside IR35 contractors can put in place from the outset, to help keep an inside IR35 determination from coming about in the first place.

Thursday 25th Apr 2024
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Written by Charlie Hemsworth

Charlie Hemsworth has been a tax consultant at leading IR35 and employment status specialists Bauer & Cottrell since 2015, and has over 20 years of experience in the contractor industry. She currently advises contractors, engagers and agencies in all things IR35 / Off-Payroll, ranging from IR35 reviews and assessments, to representing clients in HMRC enquiries.

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