What is a Status Determination Statement (SDS) for IR35?
Chances are, one of the reasons you became a contractor was to have more control over your working life: being able to charge what you feel is right for your experience level and quality of service, working flexibly to suit your own needs, and choosing which projects you do and don’t want to take on.
However, the IR35 reforms of April 2021 did take away a little bit of that control and responsibility from limited company contractors, namely, determining their own IR35 status to see if the off-payroll working rules apply to them or not. Instead, that responsibility (in most cases) now lies with your end-client, who is required to assess your IR35 status and issue a Status Determination Statement (SDS) declaring you inside or outside of IR35.
What is the Status Determination Statement (SDS)?
As a limited company contractor, it’s likely you may have already seen an SDS or two, but if work has been slow during the pandemic then you may only just be becoming familiar with them. In short, a Status Determination Statement is a comprehensive document that needs to be produced by your end-client for each contract you work on. It’s to be handed down the contractor supply chain until it reaches the company responsible for paying your company (the ‘fee payer’), and alongside of this your client should issue you with a copy directly so that you, the contractor, have it before your first payment for work done, although ideally you’ll have it before your contract commences.
The SDS should declare two things. These are:
• Your employment status for the engagement in question as a result of an IR35 assessment
• The reasoning behind this conclusion
It’s similar to the Key Information Document (KID) that contractors will already be familiar with as your client or recruiter must supply this before an engagement is agreed upon. The aim of the SDS is similar to that of the KID too, as it’s designed to target and combat non-compliance while protecting against blanket determinations, particularly in the private sector.
It would be worth also pointing out that one of the advantages of having an SDS would be that it allows you, the contractor, to see specifically why the client has deemed you inside (or outside) of IR35, which in turn allows you to defend your case more accurately should you decide to dispute the determination.
Who does the Status Determination Statement affect?
As a contractor, you should be aware of the SDS (and chase it if it doesn’t get produced) but, ultimately, the responsibility for making the IR35 assessment and producing the SDS lies with the end-client. They should pass it on to the recruiter (where there is one) and, ultimately, you.
The IR35 reforms didn’t change the legislation particularly and it remains mostly the same as it was first introduced in 2000. What has shifted is the responsibility of determining a contractor’s IR35 status for any given engagement to the end-client, and the tax liability to the fee-payer. This is also reflected in the SDS.
The SDS is largely a buffer put in place to ensure end-clients take responsibility and exercise what HMRC describes as ‘reasonable care’ when making the IR35 status determination for a contractor and prevent them from making blanket determinations where they, for instance, decide that all contractors are ‘outside’ IR35 for the sake of ease, regardless of individual circumstances.
If the requirements outlined in HMRC’s guidance for taking this care aren’t met, then the end-client assumes the position of fee-payer in the eyes of HMRC (even if the recruiter is the actual fee-payer) and therefore takes on the tax liability.
The fee-payer (so, the client in the above example) has liability for any unpaid taxes due to HMRC should a contractor later be found to be inside IR35. They also hold responsibility for reporting and deducting tax from PAYE payments made to the contractors. For this reason, providing an accurate SDS with reasonable care taken is vital in meeting statutory requirements and avoiding financial risk.
What is ‘reasonable care’?
Unfortunately, the reasonable care component of IR35 assessments has resulted in some end-clients (particularly in the public sector and in large private sector organisations) making blanket determinations to find all contractors ‘inside’ IR35. However, although this minimises the financial risk for the end-client, it absolutely does not constitute reasonable care.
If a contractor were facing an IR35 enquiry pre-reforms, reasonable care would be considered to have been taken if the contractor had:
• Acquired independent legal advice
• Made a full assessment on an individual basis
While the circumstances are not exactly the same, the same logic can be applied. So, an end-client would be expected to assess each contractor individually, and could be reasonably expected to consult an independent expert.
What if reasonable care isn’t taken?
End-clients who make IR35 decisions that are either too cautious or too harsh may find themselves facing problems in the future when it comes to engaging quality contractors as they will be incorrectly imposing employer’s NICs liabilities on either themselves or others. This could also result in penalties from HMRC.
There is no official guidance on reasonable care with regards to the production of an SDS, so end-clients need to ensure they are practising due diligence and are able to demonstrate how they took their interpretation of reasonable care.
One such aspect could be seeking independent expert advice on any given engagement. This is where the Kingsbridge IR35 Status Tool can help. For just £50 plus VAT, the tool offers an instant, accurate IR35 status along with a comprehensive report pointing to the strengths and weaknesses of the contract and working practices.
If a result is borderline, then the case is passed to one of our in-house experts for a manual review, so that you and your client can be confident that your SDS is correct, and reasonable care has, indeed, been taken.