We’ve talked a lot about IR35 recently, as it is the hottest topic amongst IT contractors, especially with the recent changes to the rules, meaning private sector clients are now responsible for determining a contractor’s IR35 status.

As part of this new responsibility, the client’s decision and reasoning must be contained within a Status Determination Statement (SDS).

This article will examine how the assessment decision should be made and what the SDS should contain.

What is a Status Determination Statement (SDS)?

Under the new IR35 rules, a contractor’s end client is now responsible for determining whether or not a contractor’s engagement comes under IR35 or not. Before the change in rules came into effect in April of this year, it was the decision of the contractor’s limited company.

This Status Determination Statement (SDS) should be in writing (either a document or email), and it must provide:

  • The status decision made by the hiring client
  • The reasons behind how they made this decision

The contractor’s client must now make a determination using reasonable care and then pass the SDS to each worker and every party in the supply chain until it reaches the end fee-payer.

Suppose any party in the supply chain fails to pass the SDS to the next party. In that case, they will effectively become the fee-payer and be responsible for deducting the workers’ tax liabilities and paying them to HMRC.

What does ‘reasonable care’ mean?

HMRC recently published guidance on what reasonable care means in terms of making employment status decisions, as there had been so much discussion amongst contractors and end clients about what the term actually meant. Many clients found determining status challenging and wanted to get a thorough process to make sure the determination was fair and valid.

According to the HMRC, all clients must be able to demonstrate that they have assessed IR35 correctly – but HMRC expects a higher degree of care to be taken by larger companies as they have more resources they can dedicate to ensuring compliance with the IR35 rules.

The guidance goes on to say that if HMRC believes the client has not taken reasonable care, then the client will inherit the IR35 liability, regardless of whether they are the fee-payer in the supply chain or not.

HMRC went to great effort in this draft guidance to say that making blanket IR35 decisions does not constitute reasonable care and constitutes bad practice.

How will a client work out a contractor’s employment status?

There are no set guidelines as to how clients will work out contractors’ employment status, and there are many different ways to go about it. They may choose to use internal expertise, for example, or call on external help.

They may decide to use:

  • A professional qualified adviser
  • HMRC guidance and established employment status principles that are based on case law
  • Commercial or official employment status tools (including CEST)

However, in all cases, the client has to be able to demonstrate that reasonable care has been taken to work out the status of each contractor. They can do this by looking at the whole picture of the assignment and the way it is carried out – including working practices and wording of the contract.

The aim of this article is not to provide legal advice to you, we are not able to do that, all we can do is share with you our interpretation of the significant changes the IR35 legislation is bringing to the world of IT contracting. If you have any further questions about any of the IR35 reforms, please feel free to email Jonathon Webley (Managing Director) at j.webley@agilerecruit.com or ring him directly on 0161 416 6634 or 07941 798 021.

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