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From April 2021 the responsibility for assessing IR35 status in the private sector shifted from the contractor to the client (HMRC defined small businesses being exempt), with the client now required to issue what is called a Status Determination Statement (SDS).
The SDS is a document that confirms the IR35 status of an engagement i.e. inside or outside IR35 and the reasons behind the determination. The client must issue the SDS before an engagement commences, passing it on to the next entity in the supply chain, with them then doing the same, until it reaches the contractor. The entity closest to the contractor becomes the fee-payer, unless a party in the supply chain has not passed it on – and in which case they automatically become the fee-payer.
HMRC introduced the SDS to help combat non-compliance, avoid blanket determinations and ensure that ‘reasonable care’ was undertaken when assessing IR35 status.
The SDS has been put in place to get the client to take responsibility and exercise what HMRC calls ‘reasonable care’ when making IR35 status determinations. HMRC do expect a higher degree of care to be undertaken by larger companies given they are expected to have greater resources to invest into IR35 compliance.
If a business does not meet the reasonable care requirements, which can be for a number of reasons, including but not limited to; not passing on the SDS, not completing the SDS or not taking reasonable care in assessing IR35 status, then they assume the position of the of fee-payer – even if another entity, usually the recruitment agency, is the actual fee-payer in the supply chain.
The fee-payer is liable for any unpaid tax due should a contractor working outside IR35 be found to be inside IR35. They also assume responsibility for reporting and deducting the relevant tax from payments made to contractors. Consequently, providing a valid and accurate SDS is essential to meeting statutory obligations and avoiding any financial risk exposure.
In brief there are a range of ways a business can assess IR35 status. Businesses can use internal expertise, or they can use external expertise and/or systems – there is no mandate as to what and or who must be used, as long as the reasonable care requirements are met.
Whilst some businesses use HMRC’s CEST tool to assess IR35 status, we’ve written here why that’s a bad idea. Others use offerings from our competitors, which can be costly, don’t offer the full range of functionality and/or don’t have the ability to offer IR35 insurance that the Contractor Compliance Portal does – which is obviously the system we’d recommend…
There are occasions when the contractor raises a dispute with the SDS. Once notified, the client has 45 days to respond otherwise they assume the role of the fee-payer. Whilst the client is under no obligation to alter their decision or provide any reasoning, they must advise of their decision either way.
