The off-payroll working rules have applied in the private sector since April 2021. In most cases, clients are responsible for determining a contractor’s IR35 status. The decision must be documented in a Status Determination Statement (SDS), along with the client’s reasoning.
Here we look at what information is contained within an SDS, how the assessment decision should be made, and what to do if you do not agree with your client’s decision.
What is a Status Determination Statement?
Under the off-payroll working rules, the end client is responsible for determining whether a contractor’s engagement falls within the IR35 rules.
Before 2021, this responsibility was held by the contractor’s company, rather than the client. And, if your client meets the definition of a ‘small’ company, the contractor retains this responsibility and doesn’t need to complete an SDS.
The end client must make the determination with reasonable care (see below). Then pass the SDS, together with the reasons for the decision, to the worker and to every party in the supply chain until it reaches the fee-payer.
An SDS must include both the status decision and a clear explanation of how it was reached. Where a determination is issued without any supporting reasons, HMRC may treat this as if no valid SDS has been provided at all if an enquiry is made.
Significantly, if any party in the supply chain fails to pass the SDS to the next party, that party can become the fee-payer. The fee-payer is responsible for deducting the worker’s tax and National Insurance and paying them to HMRC.
What does ‘reasonable care’ mean?
Clients must exercise reasonable care when making employment status decisions. HMRC has published guidance on what reasonable care means in this context, following early criticism that the term had not been clearly defined.
You can read HMRC’s guidance on reasonable care in full in the Employment Status Manual (ESM10014).
Under this guidance, all clients must demonstrate that they have properly assessed the worker’s employment status. However, HMRC may expect a higher standard of care from larger organisations, which often have greater resources.
Reasonable care is judged by the process followed, what evidence was considered, and whether the client has actively reviewed the specific facts of the engagement, not simply by the final outcome recorded on the SDS.
Companies of all sizes can meet this obligation by leveraging internal expertise or outsourcing employment status assessments to specialist advisers.
If a client fails to take reasonable care when issuing an SDS, they may inherit the IR35 tax liability, even if they are not the fee-payer in the supply chain.
HMRC’s guidance also makes clear that blanket IR35 determinations do not constitute reasonable care. As an example of bad practice, HMRC states:
Determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.
How will a client work out your employment status?
End clients can assess employment status in several ways, using internal processes, external advisers, or a combination of both. In all cases, they must be able to show that reasonable care has been taken.
Common approaches include:
- Using official or commercial employment status tools, including HMRC’s CEST tool.
- Applying HMRC guidance and established employment status principles drawn from case law.
- Engaging a professional adviser with experience in IR35 and employment status.
An accurate IR35 determination can only be made by looking at the full picture of the engagement. This includes the written contract and the actual working practices in place.
What happens if you disagree with the SDS?
If you or your recruitment agency disagrees with the SDS, you can formally notify the client.
The client then has 45 days to consider the challenge and respond.
There is no independent body to adjudicate disputes, and the client is not obliged to change its original decision.
However, it must confirm whether the SDS has been upheld or revised, and explain its reasoning.
The dispute process is intended to ensure the client reconsiders the decision with reasonable care. It is not an appeal process, and it does not pause tax deductions where the engagement has already been treated as inside IR35.
If the client fails to respond within 45 days, they will be deemed the fee-payer, unless they already occupy that position in the supply chain.
What happens if your situation changes?
HMRC guidance states:
If the working practices of the engagement change or you negotiate a new contract with the worker, you need to make sure that you re-check the rules to see if they still apply.
In practice, this means that a new SDS may be required where there is a material change to the role, the way the work is carried out, or the contractual terms.
Further resources
- Read HMRC’s guidance for clients on off-payroll working here.
- Read HMRC’s status guidance in Employment Status Manual.
- You can download a sample Status Determination Statement from Qdos here.
