Contractors can find themselves in a tricky situation if there is disagreement with an end client over a Status Determination Statement (SDS) under the new IR35 rules.
As usual, the first thing to do is to check the legislation. This is clear in showing the contractor’s rights if they disagree with an SDS that has been issued. However, it’s less clear on what happens where a decision is offered but without an accompanying SDS. These no-nonsense FAQs help to clarify the regulations and responsibilities.
What is a valid SDS?
An SDS is a statement which discloses that a client has concluded whether IR35 does or does not apply and gives reasons for that decision. However, it’s not an SDS if the client “fails to take reasonable care in coming to the conclusion mentioned in it”, according to Section 61NA ITEPA 2003.
Is a verbal statement enough to create a valid SDS?
Her Majesty's Revenue & Customs (HMRC) guidance makes clear that an SDS should be retained in accordance with normal rules on retention of payroll documents, which suggests that some written record needs to exist, although this may only show the information, not how it was presented to the contractor.
Is the client required to issue an SDS?
There are instances when a client is not obliged to issue an SDS. Private-sector clients who are not classed as large or medium entities are exempt from making status determinations. In these cases, the contractor can make the decision on the application of IR35 themselves, just as they do under the current rules.
How can contractors check if a client is exempt from making an SDS because of size?
HMRC guidance says that: “If the client does not issue the SDS, the worker can ask why. Under the off-payroll working rules, a worker has the right to request confirmation of a client’s size” (HMRC Employment Status Manual ESM 10012). The contractor should make clear in their query that they are seeking clarification of the client size for purposes of the IR35 legislation as specified in section 60H Chapter 10 Part 2 ITEPA 2003 and the client has 45 days to respond. HMRC guidance goes on to say: “If the client does not respond confirming its size within 45 days of receipt, the requestor can apply to the courts for an injunction (or an order for specific performance in Scotland), requiring the client to provide the information which will come with consequences if not adhered to.” (HMRC Employment Status Manual ESM10011A).
What happens if the client makes an IR35 decision without creating an SDS?
The legislation is clear that where an SDS is not issued, but should have been, the liability to deduct income tax, National Insurance contributions (NIC) and any apprenticeship levy moves from the fee payer to the client. HMRC guidance shows that: “If the client did not issue an SDS, the worker or deemed employer can still make representations. However, the normal 45-day time limit will not apply. The client will be responsible for any deductions of tax and NICs and payment of apprenticeship levy if the engagement is one to which the rules apply so HMRC recommend the client does consider any representations received” (HMRC Employment Status Manual ESM10015).
What can a contractor do if the client makes an IR35 decision without creating an SDS?
If the client decides that IR35 is due and is already facing a cost for funding those payments either directly or through the fee payer if one exists, there is no incentive for them to create a proper SDS or to reconsider their view. The contractor then has no other way to enforce matters. On top of this, HMRC probably don’t see it as a priority as they are getting the employment tax and NIC.
Is there any way a contractor can get HMRC to review the position?
There is one way: “Where, after completing the client’s status disagreement process, a contractor still disagrees with the client’s determination and they consider they have been taxed incorrectly as a result, the existing Self-Assessment […] and National Insurance […] processes can be followed” (HMRC Employment Status Manual ESM10015).
This refers to the internal HMRC processes for refunding tax and NICs, but it would be triggered by a self-assessment return. The contractor would have to complete their tax return as if IR35 did not apply and make a note in the white space explaining what they had done, why they had needed to complete the tax return as they have and that it was to trigger an HMRC review of their IR35 status.