We have collated some of the most common questions asked about the IR35 changes, relevant to each area of the supply chain: contractors, end-clients and agencies.
Contractor IR35 questions
If I work for a small company, do I have to create a Status Determination Statement (SDS) for the engagement?
No. If the end clients business is a small company, they should notify you that they are a small company and that they do not need to produce a Status Determination Statement (SDS). In these circumstances, you would continue as you usually do, self-assess your IR35 position and account for your own tax and National Insurance in the usual way.
The end client is a large business and my current contract extends past April 2021. It has already been assessed by my accountant as outside of IR35 – can I rely on this or does it need to be re-assessed?
The end client will have an obligation to produce a SDS to cover the period from 6 April. They must provide it to you personally and the agency in the chain immediately below the end client’s business if there is one. The legislation places an obligation on the end client to make a decision, so while your existing assessment may prove helpful in the event of a disagreement, it doesn’t stop the need for the end client to make their own decision and issue a SDS.
If the end-client issues a SDS where I am inside of IR35 and I don’t agree, what can I do?
HMRC have confirmed that a SDS issued prior to 6 April 2021 would be valid post 6 April 2021. Many end client businesses have already started the due diligence and in-house processes well in advance of the changes. We are aware that many contractors have been issued SDSs and have been asked to confirm whether they disagree or not.
We would recommend that if you are to do this you spend time formulating your response with evidence to support your view and perhaps enlist the services of your accountant or tax specialist to carry out an independent review of your engagement. This will not only add credibility to your argument but may also highlight where a client is not taking reasonable care in arriving at their decision.
If the client is not taking reasonable care in their decision-making process, they run the risk of where HMRC start an enquiry take the same view and the responsibility for the deduction of tax, NICs, payment of apprenticeship levy and paying these to HMRC would be the client’s responsibility. This would be the case even if another party has already made deductions in line with the original determination.
If the client is taking reasonable care and cannot be persuaded to change their opinion, then there is very little you can do other than refuse the assignment.
End client IR35 questions:
Can we use HMRC CEST tool to determine the IR35 status of contractors?
In our opinion, the CEST does not provide an accurate result for most of our clients because the questions do not help with real world contracting situations. If you do choose to use CEST, HMRC guidance says that this will help to demonstrate consideration.
What CEST does not do is examine the written contracts in detail, which is needed to make an accurate opinion and a valid SDS cannot be issued without examination of the written terms – a point which HMRC make on the front webpage of the CEST tool.
You should also be aware that HMRC also issue a disclaimer before you start the process and this states that HMRC will stand by the result you get from this tool. However, they then state clearly that this will not be the case “if the information you have provided was checked and found to be inaccurate”. They then confirm that “HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties.”
You have been warned!
If we use an outsourced management company rather than an agency, do we still have to complete the Status Determination Statement (SDS)?
If you are contracting with a company that is providing you with a completely outsourced provision of services, this type of company has an impact on the legislation.
The reason the end client is the decision maker is because they are the party in receipt of the contractor’s services. They have typically gone via an agency to find an individual needed within their end client organisation.
Where an outsourced company is engaged and they engage contractors, then for the purposes of the legislation it is that outsourced company which is the end client decision-maker. This is because it is the outsourced company which is in receipt of the contractor’s services and they utilise those services as they see fit.
However, great care must be taken with contractual documentation. If, contractually, the services are not fully outsourced and are for the provision of a contractor or the fulfilment of a role, then regardless of what the company calls itself, it would not been viewed as a genuine outsourced arrangement and you, as the end client, would retain responsibility to provide the SDS.
Do we have to complete a SDS for each contractor?
Yes. As decision-maker, you are responsible for taking reasonable care when coming to a decision as to whether IR35 applies. Case law on this area is clear: the facts of each engagement must be considered.
HMRC’s guidance is that it is acceptable for a client to make a status determination for a group of workers, providing the workers are engaged under the same contractual terms and conditions and in practice, work under the same terms and conditions.
However, making blanket decisions for the whole contractor workforce would not satisfy the reasonable care requirement (as they do not look at the individual working arrangements sufficiently).
Agency IR35 questions:
We are the agency closest to the client and there is another agency beneath us in the chain which engages the contractors. What obligations do we have under the new proposals?
As the agency closest to the client, you will receive the Status Determination Statement (SDS) from the client. It is your obligation to pass this SDS down the chain to the agency beneath you. If you fail to pass this down, you will effectively stand as fee payer (with the associated potential liabilities) until this is passed down.
We are the agency dealing with contractors and understand we are the “fee payer”, what exactly is our exposure if HMRC decide an engagement is caught?
Assuming you have received an “outside of IR35” SDS and have been paying the contractor gross, if HMRC subsequently challenge this then as fee payer “you” are the party who is primarily liable for the unpaid tax and NI which should have been deducted. Also, it is your agency that will need to defend the IR35 position in the event of an HMRC enquiry.
This may seem unfair given that it is the client who made the decision, but this is how the legislation is worded. The end client may become liable if it did not take reasonable care making the decision on IR35, but in most cases the liability will rest solely with the fee payer.
As the fee payer agency what do I do if I don’t receive a SDS? And what do I do with SDS’s I do receive?
As mentioned above, if you do not receive the SDS then, technically, you cannot be held liable in the event of an HMRC Enquiry (as effectively the last party holding the SDS is the party deemed as fee payer).
As a point of best practice, we would recommend you request the SDS if you have not received one for a particular contractor, even though the legislation does not oblige you to do so.
In respect of the SDS’s you have received, as you are the party who will be the subject of an HMRC enquiry, it is vital you keep copies of all the SDS’s so that you can demonstrate to HMRC that you have complied with your obligations under the legislation.
Written documentation is key to ensuring HMRC enquiries move more quickly and efficiently.
Original article written and published by Markel Tax 01/12/2020
