How is my IR35 status determined?

Typically, under the new off-payroll rules, it’s your end client’s responsibility to determine your IR35 status unless they are considered “small” by HMRC. Providing your end hirer isn’t “small”, they should conduct an employment status assessment and issue you and your recruitment agency with a Status Determination Statement (SDS) before they engage your services. You must be able to recognise the qualities of a good SDS and understand the assessment process to ensure you’re working compliantly.

What is an SDS?

An SDS is an official document issued to contractors and payroll workers by their end hirer (except those that are ‘small’), outlining the contractor’s deemed employment status. If clients fail to assess your status correctly or don’t issue an accurate SDS to the supply chain, they could be at risk of financial penalties.

To reach an accurate and compliant assessment of IR35 status, the contracts in the supply chain must be examined alongside the actual working practices.

Once the assessment is complete, the SDS confirming the position is issued.

There are three points at which assessments should be undertaken:

• In-role (contractor) assessment – this takes place when the contractor is already working in the role.
• Role assessment – this determines the likely (‘indicative’) status of a role before a contractor is appointed.
• Role re-assessment – this is the re-assessment of an assessed role. It ensures that the working practices reflect the assigned status. This assessment also takes place if a contract is extended to ensure continued compliance .

What should a good assessment look at?

All SDSs must state whether the worker would be deemed as an employee or officeholder for tax and NIC purposes.

Alongside providing you with an ‘inside’ or ‘outside’ IR35 status, a good SDS will also outline the reasons for that decision as proof that the end hirer has taken ‘reasonable care’ in arriving at that conclusion. This level of detail is an advantage for contractors because if you receive an ‘inside’ status, your SDS will explain why, meaning you know where to amend your contract and working practices if that’s possible, to continue operating ‘outside’ IR35 compliantly.

The key areas that your SDS should look at are:

• Mutuality of Obligation – are you (the contractor) and the end client obligated to one another on an ongoing basis? Are you obligated to accept work from the hirer? Is your hirer obligated to pay you even if you haven’t worked on a given day? These are all aspects that would push an assessment towards an ‘inside’ IR35 decision.
• Right to Substitute – could you offer a suitably qualified and experienced substitute for your role? If you’re able to make a substitution through your PSC, where you’re in control and your limited company processes the substitute’s payment, this would indicate you’re more likely to be ‘outside’ IR35. Crucially, this is different from an agency making a substitution.
• Control – who controls how, when, and where you deliver your work? Unless there is an operational reason for a specific location or timing, to sit towards the ‘outside’ end of the IR35 spectrum, contractors should have control over where, when, and how they deliver their output.
• Financial Risk – could you suffer financial loss? Do you need insurance? If you could suffer financially for failing to complete the job on time or to the end user’s satisfaction, this would be more indicative of an ‘outside’ IR35 status.
• Behaving Like an Employee – are you on the holiday rota? Do you use a lot of end-user equipment? Do you receive anything approaching sick pay? If these kinds of behaviours are present, you’re more likely to be considered ‘inside’ IR35.
• Your SDS should examine all of these areas as a whole, not just one or two in isolation. This is the same way that a Court or Tribunal would decide on your IR35 employment status.

Criteria for a fair Status Determination Statement

There are a few qualities that all SDSs (whether in-role assessments, role assessments or role re-assessments) should have to prove that your status is accurate and the assessment has been fair.

When you receive your SDS, check for the following criteria to determine whether it has been made fairly:

• It must confirm whether the assignment being considered is ‘inside’ or ‘outside’ IR35.
• It must say whether you would be an employee or not if you were directly engaged by the end-user (without a PSC).
• It must state the reasons for the decision – such as the level of control in place or the amount of Mutuality of Obligation present in the relationship
• It must be made using ‘reasonable care’.
• It must be sent to you and the next party in the supply chain (usually your agency) by your end hirer.

Why is your SDS important?

Although end hirers are responsible for issuing and passing on your SDS correctly, it’s in your best interest to check with your end-user that they are using a reliable and detailed SDS for two reasons:

1. Increased opportunities for ‘outside’ assignments. If you receive an ‘inside’ result, understanding the reasons behind it enables you to speak to end hirers and the supply chain to identify where you can amend your contract so you can work ‘outside’ compliantly.

Note: Once elements of your contract and working practices are changed, your end hirer should issue a second SDS to ensure your new terms are compliant.

2. Reduced risk of Liability. If you do receive an ‘outside’ result, using a good SDS proves your end hirer has taken ‘reasonable care’ when determining your status. Therefore, if HMRC challenges your ‘outside’ status, you, your employment agency, and your end hirer are unlikely to be liable for any unpaid tax or financial penalties.

If you feel your SDS is unfair

If you receive an SDS from your end hirer that you are unhappy with, or believe is unreliable, you can challenge the result. You must do this in writing (either via post or electronically), and you must include your rationale and reasons why you think that your status is incorrect. Your end hirer has a legal obligation to respond to your challenge within 45 days of receiving the dispute to help them prove they have taken ‘reasonable care’ when issuing the determination.

Please note that if you wish to challenge your SDS, you must do so before the final chain payment has been made. After this point, the ‘dispute window’ has closed, and your end hirer is no longer required to respond to your challenge.

If your SDS changes following your challenge, then the original status should be withdrawn, and your end hirer should communicate the changes to all other parties in the supply chain.

Here to help

We know this may sound complicated so we’re always here to help and advise if you need us.

If you’re unsure where you stand, speak to us and we can help you get a fair, accurate, and detailed assessment quickly using our in-house assessment tool, IR35 Complete™. Not only can we provide you with an accurate and insurable SDS, but we also have a range of compliant working solutions available, so you can have peace of mind that you’re always working compliantly while maximising your take-home pay.