The off-payroll rules place the responsibility for determining IR35 status with the medium or large company engaging the contractor. As a result, many contractors want to know how they can challenge an IR35 determination. In other words, is there any way to appeal an inaccurate or non-compliant IR35 decision?
Under the off-payroll rules, the client must take reasonable care when making status decisions and provide the contractor with a Status Determination Statement (SDS) explaining the outcome.
You can challenge an IR35 determination through the client-led disagreement process. The client must consider your arguments and respond within 45 days, but they are not required to change their decision. The quality of your evidence and the strength of the original assessment will often determine the outcome.
As part of the off-payroll rules, whichever party handles payments to the contractor’s limited company (known as the fee-payer) must deduct the appropriate tax and National Insurance where the assignment is deemed to fall inside IR35 and pay this amount to HMRC.
Understandably, the introduction of the rules sparked concern among contractors, with some questioning whether their end clients possess the skills and expertise to make compliant IR35 determinations.
This simple guide, written by Parasol, explains the steps you can take when looking to overturn an IR35 decision made by your client.
How the IR35 disagreement process works
If you disagree with an IR35 determination, you have the right to challenge it through the client-led disagreement process set out in HMRC guidance.
The process allows you to present evidence and arguments to your client explaining why the determination is incorrect.
How to appeal an IR35 determination
Let’s say your client has deemed your contract inside IR35. It’s a decision you’re unhappy with and believe is incorrect. Here’s what you should do:
- Contact your client with the details of the IR35 determination that you disagree with.
- Put forward your argument for working outside IR35, listing the specific reasons based on your contract and actual working practices.
- Make sure you keep a record of all emails, letters, and other written correspondence.
The client must respond to your challenge within 45 days of receiving it. During this period, the original determination will continue to apply.
When can you mount an IR35 challenge?
Up until you receive your final payment for the services provided to the client. But it goes without saying that if you disagree with your client’s IR35 determination, it’s in your own interests to act immediately.
What happens after you have appealed?
If your client agrees:
In an ideal world, your client will review your position (perhaps even reassess your IR35 status) and be open to reclassifying your contract as outside IR35, assuming this is where it belongs. In this scenario, you’ll be given a new Status Determination Statement (SDS) confirming the updated position and the date it applies from.
If your client disagrees:
This is where things get a little more complicated. The resolution process is client-led, which means if they disagree with the case you’ve made, they are under no obligation to change your IR35 status. There is no independent body to mediate disputes at this stage, a point of criticism since the rules were introduced.
However, that isn’t to say your IR35 challenge is dead in the water, or that you should give up. The strength of your evidence and how clearly it reflects your actual working practices can still influence the outcome.
Independent IR35 support
Having your contract reviewed by an expert will strengthen your case and lend it more credibility. As many contractors will know, the IR35 rules are open to interpretation, which is why approaching your client armed with the opinion of an objective specialist can carry more weight.
Scrutinise your Status Determination Statement (SDS)
In addition to having your contract reviewed, make sure you examine the Status Determination Statement (SDS) you have been issued. Under the legislation, your client must provide you with an SDS that explains the reasons for their decision.
If the reasoning appears inaccurate, or your SDS is identical to one issued to other contractors in different roles, you may have grounds to challenge the decision. This can indicate a flawed assessment or a blanket determination, suggesting a lack of reasonable care.
Explore umbrella working
If you have exhausted these options without success, you may want to explore working through an umbrella company. In this arrangement, you are taxed as an employee, and the IR35 rules no longer apply to your engagement.
In response to the off-payroll rules, some businesses have chosen not to engage contractors through personal service companies. Instead, they prefer to engage workers via umbrella companies to reduce compliance risk.
Further reading
- Limited company vs umbrella company
- What is a Status Determination Statement (SDS)?
- IR35 enquiry process explained
Worried about an IR35 challenge?
HMRC investigations can be expensive and time-consuming. Qdos provides expert defence and financial cover if your status is challenged.