A contractor’s guide to Supervision, Direction or Control (SDC)

The area of ‘control’ has been a mainstay of determining employment status for decades and constitutes a key part of the decision-making process when deciding a worker’s IR35 position.

HMRC & Supervision, Direction or Control: introduction

HMRC has historically put significant focus on Supervision, Direction or Control and, for a time, it was suggested that they would ‘simplify’ the IR35 rules, with the effect that the rules relied solely on SDC. This didn’t come to pass, but SDC has been used as the focal point for other pieces of legislation in recent years.

The legislation governing self-employed individuals (i.e. sole traders) working via agencies hinges on SDC alone, as does the 2016 rules governing tax relief on travel expenses.

But what is Supervision, Direction or Control and why does it matter? Here, Seb Maley, CEO of IR35 and employment status experts Qdos, explains what ‘SDC’ means for contractors, in practice.

What is Supervision, Direction or Control?

Supervision, Direction or Control (often abbreviated to ‘SDC’) is, collectively, part of the ‘Control’ test. And many contractors will already be familiar with this, as Control is used to determine IR35 status.

Control looks at four different elements of a working relationship:

  1. what work is carried out;
  2. when it’s done;
  3. where it’s done; and;
  4. how the work is carried out.

The ‘how’ is the element under the microscope when it comes to SDC. The question you should ask yourself – HMRC certainly would, if given the opportunity – is whether you are supervised, directed or controlled by your client, with regard to how you carry out your work.

If you are subject to SDC, the working relationship is more likely to be considered that of employment. This impacts your entitlement to tax relief on travel and subsistence expenses.

What is Supervision?

You may be subject to Supervision (S) if your ‘supervisor’ oversees you to ensure the work you’ve agreed to undertake and is completed correctly to the required or agreed standard.

You might also be under supervision if the overseer is helping you to develop your skills or knowledge through, for example, on-the-job training.

What is Direction?

You could be under Direction (D) if someone instructs you to do your work in a certain way. This might be through instructions, guidelines or advice about how to complete the work, or if the ‘director’ coordinates how the work is done while it’s being carried out.

What is Control?

You may be subject to Control (C) if someone tells you what work to do and how to go about doing it. This could also involve your ‘controller’ moving you from one job to another.

Just one of these three (S, D or C) needs to be present for you to fail the SDC test and be considered an employee for tax purposes.

And SDC doesn’t need to be exercised -- it just needs to be present. Similarly, it needn’t be the end-user -- say, the manager or department head who has assigned the task. It could be anyone else at the business.

In its consultation prior to the introduction of the travel and subsistence rules, HMRC suggested that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.”

Three steps you can take to stop SDC

Given the wide scope of SDC and the requirement for there to only be a theoretical right of Control, the issue may seem daunting. But there are steps you can take to shore up your position.

1. Contractual alignment

In many arrangements, contracts are comprised of upper-level and lower-level contracts, and the former -- commonly between agency and end user -- is likely to be confidential. As such, workers aren’t often privy to the content of the upper-level contract.

To avoid the possibility of Supervision, Direction or Control, you want confirmation that the upper and lower-level contracts are aligned.

2. Collate evidence in support

Next, you should have some paperwork that confirms you’re not subject to Supervision, Direction or Control -- in essence, written confirmation.

An SDC-specific ‘Confirmation of Arrangements’ document allows you, your end-client and the recruitment agency (all of whom should complete and sign the document) to outline how features of SDC are not present.

Also, keep hold of all correspondence -- like email exchanges -- covering non-contracted services. Anything discussing, for example, urgent projects that require additional services where there’s no time to draw up a separate contract helps demonstrate you are not moved around at will.

For the same reason (and where possible) keep any documents describing or detailing the end-client's specifications and requirements of the services to be rendered.

3. Familiarise yourself with case law

Once you’ve got these measures in place, it’s helpful to keep yourself informed. While the results from previous tax tribunals don’t form legal precedent, they offer a useful signpost for how judges and courts interpret Control.

Fortunately, there have been cases demonstrating that highly skilled workers, specialising in their chosen field, are rarely subject to the form of Supervision, Direction or Control that HMRC proposes.

As an example, in Morren v Swinton & Pendlebury Council, the judge ruled that ‘supervision and control’ was of little use as a test.

In Marlen LTD v HMRC, from 2011, a contractor at JCB was told he would be under the control of project leaders who would brief him. However, the work he undertook was only a small part of a wider project, and his work had to be coordinated with the greater whole for it to be viable.

This meant the contract was subject to rigorous direction and supervision, with the judge ruling that the degree of control exercised has to be considered in the wider context of work being done.

Finally, in Primary Path Ltd. v HMRC (also from 2011), the judge ruled that the contractor in question was left to do the work as he saw fit and subjected only to such supervision and direction as was necessary. As a result, the level of control exercised was not excessive.

Lastly, don’t have complacency present, either

The takeaway from these two more recent cases? HMRC lost them both. But there’s little room for complacency. So speak to an expert in the field if you’re unsure whether SDC is present in your assignments.

Wednesday 13th Sep 2023
Profile picture for user Seb Maley

Written by Seb Maley

Seb Maley is an IR35 expert, regularly commenting in national media on the topic. He is CEO of Qdos Contractor, a leading IR35 advisor and IR35 insurance company.
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