Under the off-payroll rules, from April 2021, private sector clients are responsible for determining a contractor’s IR35 status. The decision must be contained within a Status Determination Statement (SDS), alongside the client’s reasoning.
What is the Status Determination Statement?
Under the new rules, the end-client is responsible for establishing whether or not an engagement is caught by IR35 or not. Previously, this determination was left to the contractor’s limited company to decide.
A status determination statement is simply a written statement put together by the decision-maker, the end client, stating the employment status of a contractor following an IR35 assessment.
The statement, which can be created in the form of a document or email, will state whether IR35 applies to their engagement with the contractor (whether the contract falls inside or outside IR35) and offer an explanation on how the deemed employment status conclusion was made.
The SDS shall contain:
• the status decision made on an engagement;
• the reasons which led to this decision.
The end-client must make a determination using reasonable care (see below), and pass this document, plus the reasoning behind the decision, to each worker and every party in the supply chain until it reaches the fee-payer.
Significantly, if any party in the supply chain fails to pass the SDS to the next party in the chain, then they will become the ‘fee-payer’, responsible for deducting the worker’s tax liabilities, and paying HMRC.
What does ‘reasonable care’ mean?
Clients must take ‘reasonable care’ when making employment status decisions. According to the new guidance, all clients must demonstrate that they have assessed IR35 correctly, but HMRC may expect a higher degree of care to be taken by larger companies that have greater resources to dedicate to 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.
How will a client work out your employment status?
Companies will take on the task of establishing employment status in different ways – using internal and/or external expertise. In all cases, they have to be able to demonstrate that reasonable care has been taken to work out the status of each contractor.
They may use one or more of the following methods:
• Official or commercial employment status tools (including CEST – despite its limitations).
• HMRC guidance and established employment status principles, based on case law.
• A professional, qualified advisor.
Importantly, 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 the contractor doesn’t agree with the SDS?
If the contractor or the recruitment agency disagree with the SDS, then the contractor needs to inform the client.
The client has 45 days to respond, but significantly, there is no independent body to act as a referee. The client is under no obligation to change their mind, but they must let the contractor know either way.
If the client doesn’t respond within this time period, they will assume the role of ‘fee-payer’ (if they don’t already do so).
If you would like a template Status Determination Statement or assistance in completing one please do get in touch firstname.lastname@example.org or +44(0)7917 878384.