Status Determination Statements: Does business size matter?

Status Determination Statements: Does business size matter?

Markel Tax Consultant Alex Seal assesses the importance in the size of your business when drafting a status determination statement (SDS). 

Does business size matter? The short answer is yes. However, as ever with the off-payroll working (IR35) legislation, nothing is ever quite that straightforward! The introduction of the new IR35 in April 2021 was primarily aimed at businesses engaging Limited Company contractors (PSCs) in the private sector and based on lessons learned from the 2017 public sector changes regarding a lack of clarity for determining and communicating IR35 status.

The April 2021 changes in the private sector now place the onus on medium and large-sized businesses (we consider the definition of these below) to:

  • Determine the ‘IR35 status’ of each engagement;
  • Take reasonable care in reaching that decision;
  • Communicate the decision to the contractor and any other relevant party; and
  • Provide a client-led disagreement process if the contractor wishes to challenge the decision

For public sector bodies, the answer to the title question 'Does business size matter?' is an emphatic 'no'. The onus is on all public sector bodies to determine the IR35 status of every engagement and issue an SDS, regardless of whether it is a small, medium or large-sized entity.

However, the rules for the private sector are inevitably more complicated and, as noted above, size really does matter. Our primary focus in this article will be to explore the rules and requirements for the creation and issue of an SDS, which clients it affects, and why this must not be considered a mere box-ticking exercise.

How do I know if my business is medium or large?

The starting place is the Companies Act definition at s382 CA2006. It defines a small company as meeting two of the three following conditions:

  • An annual turnover of no more than £10.2 million
  • A balance sheet total of no more than £5.1 million
  • Fewer than 50 employees

If your business does not meet two or more of the above conditions, then for purposes of determining the IR35 status of an engagement, the entity would be considered medium or large and responsible for the IR35 status of an engagement.

Businesses that would meet the definition of a small company would fall under the small companies exemption for IR35. However, this does not mean that IR35 no longer needs to be considered - it means that the responsibility for determining IR35 status (and the tax liability for getting it wrong) remains with the contractor, and that the pre-April 2021 rules (under Chapter 8 Part 2 ITEPA 2003) must be applied.

I have to determine the status of my contractors: how can I do this?

The contract and working practices must both be considered to determine if an engagement falls ‘inside’ or ‘outside’ IR35.

HMRC understands that businesses have different access to tax knowledge and resources, so you can use a third-party company to assist in determining status. However, you will need to retain oversight, as you cannot simply discharge your obligations to an advisor should you wish to engage them. This is mentioned in HMRC’s guidance (ESM10014) as an example of taking reasonable care when creating an SDS.

To communicate the IR35 decision to the worker, you are required to produce a Status Determination Statement (SDS).

Do I have to produce an SDS, or can I email or verbally pass on the decision instead?

Yes – an SDS must be produced, and an email or verbal communication would not suffice. The legislation requires an SDS to be provided to the individual working through a personal services company (PSC) and, if applicable, the party directly below the end client in the chain (i.e. a recruitment agency).

An SDS must include:

  • Your decision on the status of the engagement, by considering the three key tests (personal service, control and mutuality of obligation), in-business factors, and whether the position of an office is held
  • Your reasonings for coming to that decision

Reasonable care must be taken when creating an SDS. However, there is no explanation in the legislation of what constitutes ‘reasonable care’. HMRC does provide some guidance at ESM10014 which provides examples such as seeking professional advice, reviewing processes applied, and making a new SDS where there is a material change.

Examples that do not constitute ‘reasonable care’ in HMRC’s guidance are factors such as: making blanket decisions for all contractors; providing inaccurate information in the Check of Employment Status for Tax (CEST) tool; failing to consider all evidence; or failing to ensure the person carrying out the SDS is sufficiently trained.

Can I use the CEST tool to create an SDS?

HMRC’s CEST tool was designed to assist in determining the IR35 status of engagements. Whilst HMRC stands by the CEST and advocates its use for demonstrating reasonable care, we do not agree that this is the best way to determine IR35 status.

A tool properly developed by and supported by IR35 experts is a sensible proposition, as it allows you to retain the level of oversight HMRC expects you to have.

There are a number of issues with CEST:

  • It only focuses on whether a substitute has been sent and whether the client has the right to reject a substitute, as opposed to what the case law test has established over the years: whether there is a right to send one.
  • The tool also fails to reference mutuality of obligations (MOO) as a key test – it assumes that because there is a contract, MOO must exist

However, the most damning outcomes are the number of public sector bodies which have recently been fined for incorrectly determining status using the CEST tool: DWP (£87.9m), Home Office (£33.5m) and, ironically, the HM Courts and Tribunal Service (£12.5m).

CEST also assumes an innate understanding of the contractual terms. For example, substitution might be addressed, but without a full understanding of IR35, one might not appreciate that the clause is actually too fettered.

In addition, it does not provide reasonings for coming to its conclusion – arguably, this would not be considered 'taking reasonable care'. In a report carried out by HMRC on its CEST usage, it was found that in a period of just under two years (25 November 2019 to 31 August 2021), there was a 21% undetermined status results rate. An organisation, therefore, cannot rely on a tool that shows a high rate of undetermined results – putting ‘status undetermined’ on an SDS is not an option.

Do the SDS rules apply to overseas clients?

If an overseas business has no UK presence regardless of the size of the business, then the requirement to determine the status of an engagement and create an SDS would not apply to that entity.

However, a common misconception is that this means contractors are outside the scope of IR35 and it does not have to be considered. This is a myth and does not put the contractor outside the scope of IR35. In this case, it would again be the contractor that would be responsible for determining the IR35 status.


Ultimately, the size of the business needs to be considered in the first instance in order to comply with the obligations imposed by the IR35 Legislation. Providing an SDS where required can protect your business from potential liabilities, but only if reasonable care has been taken. Unfortunately, what constitutes reasonable care is as subjective as what constitutes employment, so taking specialist advice is essential.