Status Determination Statements

Information on the new requirement for assessing IR35

Dec 14, 2020
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IR35 Guide – Status Determination Statements

From April 2021, both private and public sector clients are responsible for determining a contractor’s IR35 status. The decision must be contained within a Status Determination Statement (SDS), alongside the reasons of the decision.

What is the Status Determination Statement?

Previously, the determination of whether an engagement was ‘inside’ or ‘outside’ IR35 was left to the contractor’s limited company to decide. In HMRC’s eyes this led to a lot of non-compliance and so under the new rules, this decision now sits with the end hirer.

The end-client must decide the status and reasons for reaching it by using ‘reasonable care’ and pass this document to each worker and every party in the supply chain until it reaches the fee-payer e.g. a recruitment agency.

Significantly, if any party in the supply chain fails to pass the SDS onto the next party in the chain, then they will become the ‘fee-payer’, responsible for deducting the worker’s tax liabilities, and paying them to HMRC.

What does ‘reasonable care’ mean?

Clients must take ‘reasonable care’ when making employment status decisions, which was a very unclear term and HMRC had to publish guidance on this topic, following criticism that there was no official definition of what the term really meant.

According to the new guidance, all clients must demonstrate that they have assessed IR35 correctly, but HMRC will expect a higher degree of care to be taken by larger companies that have greater resources for compliance. Should the client fail to take reasonable care, they will inherit the IR35 liability, regardless of whether it is the ‘fee payer’ in the supply chain. HMRC also state that making blanket IR35 decisions e.g. that an entire workforce is caught by the off-payroll rules does not constitute reasonable care, although another way for end hirers to approach this could be to for them to not offer a ‘Limited’ option for future assignments?

How will a client work out the employment status?

For some companies this will seem like an impossible job and a high-risk strategy. In all cases, they must be able to demonstrate that reasonable care has been taken – to work out the status of each contractor.

The following considerations are listed in the draft guidance:

  • Using official or commercial employment status tools e.g. CEST – despite its limitations, but also services from IR35 Shield and Qudos. All the status checking tools require a lot of questions to be answered, so it’s best to be prepared.
  • Accurately applying and keeping a record of the employment status principle.
  • Having someone with a good understanding of the work to be undertaken involved in the determination process.
  • Using HMRC guidance and established employment status principles, based on case law.
  • Reviewing the processes being applied and amending for future determinations where necessary.
  • If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.
  • Using a professional, qualified advisor.

Obviously, the points to consider are not straightforward but it goes to show that a client can only make an accurate IR35 status decision by looking at the whole picture of the assignment and the way it is carried out including contract wording and working practices.

What happens if someone doesn’t agree with the SDS?

If either a contractor or the recruitment agency don’t agree with the SDS, then this needs to be fed back up to the end client.

They will then have 45 days to respond, but there is no other body to act as a referee. The client is under no obligation to change their mind, but they must respond either way because if not, they will then assume the role of the fee-payer and hold liability.

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