Following on from our recent IR35 preparation article, this insight will take a closer look at the Status Determination Statement ('SDS'). This includes examining who is responsible for issuing an SDS, what the SDS must contain, and what should happen when there are group end clients and group or role-based assessments. We will also look at how liability passes through the contractual chain and the risks involved for each party.
Who Issues an SDS?
First of all, it must be established that the off-payroll working rules apply. This means that the contractor in question must be operating via an intermediary (see ESM10003) and the end-client is either a public or medium/large sized business.
If the new IR35 rules apply, the end-client (the party that receives the work of the contractor) is responsible for assessing a contractor's IR35 status. The end-client must decide whether, if the contractor's intermediary ('PSC') did not exist, and removing any intervening parties (such as any agencies that may be in the contractual chain), the contractor would be an employee of the end-client. If the end-client is part of a group that is made up of several companies, then one of those companies (the one in receipt of the worker's services) will be the end-client.
It is worth noting that the end-client will only be deciding whether or not the contractor is an employee for tax purposes, as tax law does not recognise the concept of 'worker'. This does not make the contractor an employee with employment rights, and it is unclear whether being inside IR35 will lead to more employment claims from contractors.
Once the end-client has made the status determination, it must communicate this in the form of an SDS. The SDS should be passed down the contractual chain to each contractor (not the PSC) and any third party the end-client contracts with (i.e. the agency it contracts with).
Where the work has been truly contracted out under a statement of work ('SOW'), the end-client is likely to be the agency (depending on the contractual chain of each arrangement). We will be publishing a more in-depth article on this topic soon.
What is an SDS?
There is no set wording for a SDS, but for it to be valid, the end-client must:
- Conclude whether or not the contractor would be an employee or office holder, or is an office holder, for tax and NICs purposes if they were directly engaged by the end-client,
- Provide their reasons for coming to that decision, and
- Have taken 'reasonable care' (see ESM10014) in coming to that decision.
HMRC believes that “accurate outputs from the enhanced version of the Check Employment Status for Tax ('CEST') tool meet the legislative requirements to be a valid SDS.”
The legislation does not specify the format or method of the SDS, however the end-client should make sure that the contractor is able to receive and/or access the SDS. HMRC gives examples of the SDS being provided via e-mail, a letter or an online portal.
The SDS does not have to state the name of the end-client, so if the end-client is part of a group, they can show the group as the end-client, provided that the decision was made by the company in receipt of the contractor's services. The end-client can confirm its size for the tax year(s) in question in the SDS, as this will ensure that any responsibility it may have
to confirm its size (if asked by the contractor or agency it contracts with) is satisfied.
If there are material changes to the working arrangements (like a change in terms) or practices, the contractor's status should be reviewed and a new SDS should be produced. If the status remains the same after the review, it would be good practice to still issue a new SDS to show that reasonable care has been taken. If a contract is extended on exactly the same terms and conditions, this may not qualify as a 'new' contract and may therefore not require a new SDS. If the contract is extended but terms have changed, or the end-client has issued a new contract, then a new SDS should be issued.
Please note, standard document retention rules apply to the SDS.
Finally, the SDS can be challenged through the status disagreement process led by the end-client.
What about Group Assessments and Role-Based Determinations?
The end-client can make a status determination for a group of contractors if those contractors are engaged under the same contractual terms and conditions and work under the same working practices. If any of those factors vary, each contractor's status should be considered individually. While a position can be advertised as inside or outside IR35, the end client will still be responsible for making a status determination using reasonable care and issuing an SDS. As before, it is possible to make role-based determinations for contractors working under the same terms and working practices but if any of those vary in any way, each contractor's status should be considered individually.
When Should the SDS be Issued?
Ideally the SDS should be issued before the first payment for any services commencing on or after 6 April 2021. It can be issued at any point before the final payment, but this may make the end client liable for any payments made before the SDS is issued and passed down the contractual chain.
It is possible to issue the SDS before 6 April 2021 for services provided on or after that date as long as it is accurate and meets the requirements set out above. If a contract started before April 2021 but continues after the 6 April 2021, the end-client should issue an SDS.
Passing on the SDS
As mentioned previously, the end client should pass the SDS onto the contractor and any third party it contracts with. The end-client is the only party required to pass the SDS to the contractor. If there is more than one agency in the chain, the SDS should be passed down the chain until it reaches the party immediately above the PSC (the 'fee payer'). Normally the fee-payer would then account to HMRC for the tax due. Please note that if there are international agencies or end-clients involved, the application of the rules will be different.
Liability and Risks
If the end client has not exercised reasonable care in making the status determination, the SDS will not be valid, and the end-client will become responsible for deducting and paying any relevant taxes to HMRC. HMRC may also consider an end client's failure to pass on the SDS to the contractor or any relevant third party as evidence of lack of reasonable care when calculating any penalties.
The end client can subcontract or allow a third party, such as an agency, to determine the contractor's status and/or create the SDS. However, the end-client will still be responsible for taking reasonable care, making sure the status determination is accurate and passing the SDS down to the aforementioned parties
The end client will need to be satisfied that it agrees with the status determination and that the subcontracting parties have properly considered any contractual terms as well as the working practices. If the end client does subcontract its responsibilities, it should make it clear to any other parties in the contractual chain that the subcontracting party is acting on the authority of the end-client.
If the end-client either does not issue the SDS or does not pass it to both of the correct parties (the contractor and agency), it will be responsible for the associated tax. Similarly, if a party in the contractual chain receives the SDS but does not pass it on, they become the 'deemed employer' and are responsible for the relevant taxes until the SDS is passed on. If any payments have been made before the SDS is passed on to the fee-payer, the deemed employer is responsible for accounting for tax on those payments. Payments made after the SDS is passed to the fee-payer will be responsibility of the fee-payer.
There are also some more complex issues around changes in size and/or if the end-client issues an SDS because it wrongly concluded it was a medium/large business, which we are not going to discuss here but we recommend that you research.
Lockton can assist with your IR35 insurance requirements, helping you to remain compliant with regards to the SDS and reduce your exposure to tax liability. If you have any questions or wish to know more about how we can help to protect your business, please get in touch.