Creating IR35 status determination statement SDS for your contractors

When the off-payroll working rules came into force in April 2021, responsibility for determining IR35 employment status shifted from the contractor to the medium- and large-sized private sector businesses that hire them.

Only contractors providing services to smaller companies are still permitted to self-determine IR35 status.

IR35 determination for employers is complex. So what do you need to know to be compliant?

To speak to IR35 determination specialists, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.

Your IR35 status determination statement (SDS) checklist

To protect your company from the financial risks associated with misdetermining contractor status, take the following steps:

Do a case-by-case analysis of each contractor’s working practices
Don’t rely on the CEST tool
Check that the contractual arrangement with your contractor places them clearly outside IR35
Regularly check that the conditions your contractors work under match the contract and are demonstrably outside IR35
Keep ongoing records of the working arrangements for each and retain proof showing activity that is outside IR35 (for example, providing a replacement to provide services, charging your for work not covered in the contract and you paying, and so on)
Respond in a timely fashion to contractor disagreements with an assessment. If your status decision does change, inform everyone in the supply chain straight away.

Status determination statement FAQ

Who is the end client and the fee payer?

End clients are ultimately responsible for determining IR35 status and providing determination statements.

The “end client” is the business benefitting from the services provided by the contractor’s personal service company. The “fee payer” is the business paying for the services provided by limited company contractors and their substitutes (if applicable).

If the contractor is working inside IR35, the fee payer is responsible for paying income tax and National Insurance contributions (and the Apprenticeship Levy if applicable) on services personally provided by the contractor.

In direct working arrangements with self-employed contractors operating through limited companies, a company is both the end client and the fee payer.

Where a contractor has been engaged through a recruitment agency, your business is the “end client” and the agency the “fee payer”.

When do we need to create status determination statements?

Before a contractor begins work, you need to create a status determination statement. In the statement, you must set out in detail whether their working practices they are subject to fall within IR35 or not.

If you hire through a recruitment agency, you must send them a copy of your status determination. When longer supply chains are involved, you must send all other parties in the supply chain a copy.

What is reasonable care?

When making employment status decisions, you have to demonstrate reasonable care. As the hiring organisation, you should check every contract individually when arriving to a status determination.

You will fail the reasonable care test in HMRC’s eyes if you issue:

Blanket decisions across all contractors
Role-based assessments (contractors doing the same type of job are covered by the same status decision)

To be compliant, you must consider every working arrangement on a case-by-case basis.

If you fail to produce an SDS, you will be deemed to be the fee payer, even if you have contracted someone through a third party who would otherwise be the fee payer.

Do I need to create a status disagreement process?

You should put a status disagreement process in place in case a contractor disagrees with your statement.

Your contractors can raise the disagreement with you verbally or in writing.

If raised verbally, keep records throughout the process for compliance and evidential purposes. If raised in writing, you’re obliged to close the process within a 45-day time limit. If you don’t respond an answer within that time frame, HMRC will assume that your company is the fee payer.

Should I use the CEST tool?

HMRC provide an online IR35 assessment service called Check Employment Status for Tax (CEST). Do not rely on this. In one in five cases, it is unable to determine IR35 status. In addition, the code powering the tool has been buggy since 2019.

What if a contractor is trading through a limited liability partnership?

Although there are arguably situations in which an LLP may be used for a contract outside IR35, it’s a much harder argument to make than with a limited company. If you really want to work with a contractor insisting on using an LLP, please take advice beforehand.

Take control of IR35 within your business

Many employers did not welcome the change in off-payroll working rules as they shifted responsibility for determination and financial risk onto them.

The move was an intentional attempt to persuade HR and procurement directors and managers into declaring all contractors’ working practices within IR35 for fear of being heavily fined.

But the IR35 rules themselves about what constitutes a contractor did not change. By working with CoComply, we can ensure that the contractors you want work legally outside IR35. This saves your company money and makes providing services to you a lot more financially attractive to them.