More than a month has now passed since the IR35 changes were introduced and research shows that not only are some contractors yet to receive a status determination statement ('SDS'), but more than half of contractors plan to dispute their IR35 status.
Added to this, that some end-clients are relying solely on CEST, which may create a challenge for those businesses if they do not fully understand why CEST came to the original status decision. These clients may struggle to address concerns raised during the disagreement process as a result.
Similarly, while some third-party services come with a disagreement process, it is important to remember that while end-clients can outsource their responsibilities, they cannot outsource their liability, and the end-client will still be liable if they do not take reasonable care or comply with the legislation.
Given the potential wave of status challenges coming to end-clients, in this article we take a look at what the status disagreement process is, and what it must include, as well as provide some helpful tips for recruiters to manage the process.
What happens if there is a status challenge?
If a contractor or deemed employer (typically the recruitment agency) disagrees with the status determination of the end-client, they can dispute the decision by raising “representations”. An agency within the contractual chain who is not the deemed employer does not have the right to use the disagreement process.
The party challenging the determination will need to explain the reasons why they think that the determination is wrong and provide supporting evidence to the end-client.
While there is no requirement for the representations to be made in writing, and they can be raised verbally, in order to keep evidence for compliance purposes and any future audits, it is good practice to make the challenge in writing and keep a record of responses.
Because employment status can change over time, a determination can be challenged for either the whole period or for a part of the engagement.
The status disagreement process is client-led, which means that each individual end-client is in charge of creating and implementing their own status disagreement process, albeit there are some minimum requirements which we will look at below.
The disagreement process requirements
As a minimum, the legislation requires the end-client to consider the contractors and/or the deemed employer's representations and respond within 45 days from the date that the representation was received, confirming either that:
- The original determination was correct and reasons for this decision
- The original decision has changed (including the date from which the new determination applies and confirmation that the original determination is withdrawn).
All parties should continue to apply the rules in line with the original determination until the end-client responds to the challenge.
If the determination has changed, the end-client must provide a new SDS to all relevant parties. For more information on what an SDS should contain, please see our previous article. The end-client must also state from when the new SDS applies, e.g. if the SDS was wrong from day one then the SDS should be backdated to day one. If it changed because of new working practices mid-way through the engagement, it should be backdated to the date of new working practices.
If both a deemed employer and contractor raise disputes, these would be classed as two separate disagreements, each with their own 45-day time limit. However, if the reasons for the disagreement are the same, the end-client can consider both disagreements as one and send the same response to both parties.
The rules do not set a limit on how many times a disagreement can be raised, but if there is insufficient information provided, or if there are no new facts or evidence, the end-client may state that it has insufficient information or either provide the same answer as before in the previous disagreement or state that the disagreement has already been considered
If consensus cannot be reached in relation to the status determination, there is no appeal to HMRC, and the contractor may wish to seek independent advice on any further options.
It is vital for end-clients to have a status disagreement process in place in order for them to discharge their legal liabilities. If the end-client does not comply with the minimum requirements of the status disagreement process, for example by not responding within the 45-day time limit, they become liable for all employment taxes and will need to pay these to HMRC. This will be the case regardless of whether the client took reasonable care in making its determination.
It is worth noting that a status challenge can be lodged at any time up to the last chain payment for that engagement being made, though the end-client does not have to respond if there is a challenge after the final payment is made. Therefore, it is important that a good status disagreement is in place to avoid any nasty surprises such as backdated taxes.
Tips for Improving the Status Disagreement Process
So, given the fact that status disagreement process will vary depending on the end-client, what are some things that recruiters can do to improve their understanding of the disagreement processes and manage risk?
We recommend that recruiters:
- Request a copy of the disagreement process ahead of time or make sure the end-client is contractually obligated to provide a copy. This is because the end-client is only required to have a process in place and will not necessarily share it otherwise.
- Become familiar with the end-client's disagreement process so that you are able to challenge any statuses, saving time and confusion
- Consider setting out a more onerous dispute resolution process in any contracts so that you have more control over the fairness and expedience of the process
- Have a good admin process in place. A disagreement may be triggered by a verbal challenge and without administrative care, there is a risk of accidentally disputing the determination.
- Work together with the end-client to create a fair and efficient status disagreement process which can be utilised quickly to preserve working relationships and avoid costs.
- Help to educate and work with end-clients. Many businesses are taking a risk averse approach and unfairly classing contractors as inside IR35. Not only could this show a lack of reasonable care, but there is also a risk that liability may be passed onto recruiters through indemnities in contracts. It is therefore particularly important for recruiters to help end-clients come to correct determinations
- Review any SOW contracts they have, or any contracts where there is a fully outsourced service, as the recruiter may be the end-client in these contracts, and will therefore be in charge of creating and running their own status disagreement process.
- Finally, recruiters should ensure they are auditing all businesses they work with, and in particular umbrella companies to avoid being accused of promoting tax avoidance. There has been a surge in end-clients and recruiters recommending the use of umbrella companies, and while many are legitimate, it is a largely unregulated industry. HMRC recently published guidance on working through umbrella companies and avoiding tax avoidance schemes.
As HMRC has promised a “light-touch” approach for the first year of the changes, now is the best time for businesses to get to grips with their responsibilities under the off-payroll working rules and make sure that they are implementing robust internal strategies.
As teething problems occur during this first quarter, there is plenty of time for changes and new solutions to be put in place to address any issues. HMRC is also offering various resources and support for businesses to make sure they get it right.
A business that does not have a fair and efficient disagreement process in place risks damaging relationships with both recruiters and contractors, which can result in losses of unique skillsets, increased operational costs and also reputational damage.
It is also unlikely that the soft-landing will continue in the next financial year and businesses that fail to get to grips with IR35 this year could face hefty penalties.