With IR35 reforms fast approaching (due April 6th 2021), many end hirers and recruitment agencies will now begin conducting Status Determination Statements on their contractors. This is because, from April 2021, the end hirer will be responsible for determining their contractors’ employment status and ensuring the correct taxes are paid, with the recruitment agency facing the risk of financial penalties from HMRC if the taxes are paid incorrectly.
As you’ll no longer be responsible for your employment status determination, you need to make sure your end hirers are conducting your role assessment fairly, because the results of your SDS can have a huge impact on how you work and how much take-home pay you’ll receive. You must understand:
- What is an SDS
- Why it impacts you
- How an SDS is determined
- What makes a ‘fair’ SDS
- What to do if you feel your SDS is unfair
What is a Status Determination Statement (SDS)?
An SDS is a statement of your employment status (i.e. ‘inside’ IR35 or ‘outside’ IR35) which must be passed from your end hirer to you and your agency after your end hirer has conducted an IR35 status assessment on your role. If conducted with a professional and compliant tool, the IR35 assessment should state your IR35 status and the reasons for that conclusion, taking into account your working practices as well as the contracts in your supply chain.
How does SDS impact me?
As the responsibility will no longer fall on you to determine your own employment status, you will need to speak to your end hirer/agency as soon as possible to find out how they plan to manage and determine your IR35 status. It’s in your best interest to ensure that you receive a fair determination and are working compliantly for two reasons:
- If you have an SDS which places you unfairly ‘inside’ IR35, you could risk losing out on take-home pay. Some end users may implement blanket bans on PSCs to protect themselves from financial risk. It is possible that end hirers will no longer want to pay contractors on an ‘outside’ IR35 basis, so they may try to unfairly class you as ‘inside’ IR35 to retain your talent while protecting themselves from risk.
If you are classed as ‘inside’ IR35, either correctly or incorrectly, this will mean you will need to find a new working option, such as working through an Umbrella company (like JSA Umbrella ) or our IR35 Flex solution which allows you to seamlessly switch between Limited Company and Umbrella contract roles depending on their IR35 status.
- If you are issued an ‘outside’ SDS, you can continue working through your own Limited Company and determine your own salary/dividend structure, you personally will only be taxed on what you take as salary and dividend. However, ensuring this ‘outside’ determination has been made fairly is vital to give you peace of mind that you’re working compliantly and mitigate the risk of financial penalty throughout the supply chain.
How is my SDS determined?
When conducting a compliant SDS, there are lots of factors at play which all have to be considered together to decide whether your role is ‘caught’ by IR35 (i.e. you’re working practices/contracts reflect that of an employee rather than someone self-employed).
Among a host of other considerations, some of the main indicative factors of IR35 status include:
- Mutuality of Obligation – are you and the end hirer obligated to one another on an ongoing basis?
If so, this would indicate you are in a situation which looks like employment, or an ‘inside’ IR35 situation.
- Right to Substitution – can you substitute yourself for a suitably qualified and experienced replacement?
If your PSC can offer a substitute for a role, then the assignment is more likely to be considered ‘outside’ IR35.(NOTE: the agency cannot make the substitution, it must be the owner of the PSC).
- Control – can the hirer control how, when, and where the work is delivered/carried out?
If you have to comply with requirements from your hirer, which are not based on operational necessities, you are working more like an employee ‘inside’ IR35.
- Financial risk – could you suffer financial loss in the event of unsatisfactory or late delivery?
If so, this would indicate that you are ‘outside’ IR35 – you are working like any other business, not an employee.
- Behaviour – do you behave like an employee?
For example, are you on the holiday rota or in the employee performance management system?
If so, then you would be considered more likely to be ‘inside’ IR35.
All of these factors would be considered as part of the IR35 assessment alongside the contracts in place and your working practices.
What makes a ‘fair’ SDS?
All SDSs (whether in-role assessments, role assessments or role re-assessments) should have certain qualities to prove they have been made fairly.
A good SDS should state whether you would be an employee or officeholder for tax and NIC purposes if you were directly engaged by the hirer (i.e. whether you’re ‘inside’ or ‘outside’ IR35). It must outline the reasons for that decision and demonstrate that the hirer has taken ‘reasonable care’ to arrive at that conclusion.
Here, we’ve put together a quick checklist to help you determine whether your SDS has been made fairly and with ‘reasonable care’. Your SDS must:
- Confirm whether your current role is ‘inside’ or ‘outside’ IR35?
- Explain whether you would be an employee if you were directly engaged by the end hirer. (without the use of your PSC)
- State the reasons for your decision – such as the level of control in place or your actual working practices.
- Be passed down accurately from the end hirer to you and your agency.
What if I feel my SDS is unfair?
If you’re happy with your IR35 status and you believe it has been made fairly, then that’s great! You can now focus on switching to Umbrella or our Flex solution if you’re currently ‘inside’ IR35 or continuing to work through your PSC if your status is ‘outside’.
If you do receive an ‘outside’ IR35 SDS, we recommend keeping copies of anything that helps to support your position.
If you’ve used a substitute, for example, keep documents that record this. If you’ve been able to decide when and how you work, keep evidence of that. By retaining these, it will usually be easier and quicker to deal with any difficult questions from HMRC if your status is challenged later.
However, if you feel that your SDS has been made unfairly or without ‘reasonable care’, you can challenge it. You must do this in writing (either via post or electronically) before the final chain payment has been made. After this point, the ‘dispute window’ has closed and your end hirer is no longer obligated to reply to your dispute. In your written challenge, you must include your rationale and reasons why you think your status is incorrect.
Again, providing evidence of important documents such as the agreement of your financial risk or a record of using a substitute can be invaluable in this scenario.
Providing you challenge your status within the ‘dispute window’, your end hirer has a legal obligation to respond to your challenge within 45 days of receiving the dispute to prove they have taken ‘reasonable care’ in determining your status.
If your SDS changes following your challenge, the original status should be withdrawn, and your end hirer should send further communication to all other parties in the supply chain confirming your new status.
How we can help?
It’s vital that you understand where you stand in time for April so that you have time to find a new working option or challenge your SDS if necessary.
If you’ve received an SDS, but you’re unsure whether it has been made fairly, get in touch with one of our expert accountants who will be able to give you advice on your situation and next steps.