Being your own boss certainly has perks; you have full control over your working day, can charge what you feel is fair for the quality of your services and experience, and choose the projects you want to take on. However, it also comes with responsibilities. Most contractors will by now have heard of the IR35 reform, whether you’ve already come across it in public sector work or are anticipating its rollout to the private sector come April 2020. If you’re a limited company contractor, you’ll be seeing another piece of paperwork to do with IR35 – the Status Determination Statement, or SDS.
What is the Status Determination Statement?
In short, the Status Determination Statement is a comprehensive document that the end-client must produce and hand down the supply chain, ultimately ending up with the contractor (i.e. you) when making an IR35 employment status determination. This should happen before a contract commences. This statement should declare two things:
- a contractor’s deemed employment status following an IR35 assessment; and
- the reasoning behind the conclusion.
This document is similar to the Key Information Document (KID) that a client or recruiter must supply to a contractor before an engagement is agreed. The aim of the SDS is also similar to that of the KID – it’s designed to help combat non-compliance and blanket determinations, particularly when it comes to private sector corporates.
Who is affected by the Status Determination Statement?
As a contractor, you should be aware of this document, but it’s ultimately the responsibility of the client to produce the SDS and pass it down to the recruiter and yourself. IR35 has been in effect since 2000. The reform coming in April next year doesn’t change the legislation per se but transfers the responsibility (and liability) of determining if a contractor is inside or outside IR35 to the fee-payer – i.e. either the recruitment agency or end-client engaging the contractor’s services. This is also reflected in the Status Determination Statement.
As stated above, the SDS has been put in place mainly to get the client to take responsibility and exercise what HMRC calls ‘reasonable care’ when making IR35 status determinations. If the requirements outlined in the document for taking such care aren’t met, the end-client assumes the position of ‘fee-payer’ – even if the recruitment agency is rightfully the fee-payer in the supply chain.
The fee-payer (the client in this instance) takes liability for any unpaid tax due should an engaged contractor be found inside IR35. They also assume responsibility for reporting and deducting tax from payments made to contractors. Consequently, providing a valid and accurate Status Determination Statement is essential to meeting statutory obligations and avoid any financial risk.
What constitutes ‘reasonable care’ when producing a Status Determination Statement?
Being a necessary component of an SDS, it’s important to be able to determine what does, and doesn’t, constitute ‘reasonable care’ when conducting status assessments.
Due to the somewhat ambiguous ‘reasonable care requirement’ outlined in the off-payroll legislation, blanket assessments have become commonplace amongst public sector hirers, and, increasingly, large private sector companies. So what exactly are the appropriate measures to take when making IR35 status determinations? In the context of a contractor facing an enquiry, reasonable care would constitute:
- acquiring independent legal advice; and
- making a full assessment on an individual basis.
Though applied to a different context, this would mean that clients conducting blanket status assessments would have failed to have taken reasonable care, on the basis that they failed to assess contractors individually.
What happens if reasonable care isn’t taken, according to the Status Document Statement?
Clients making IR35 decisions that are too harsh or cautious will be incorrectly imposing employer’s NICs liabilities on themselves or others, and therefore will face inevitable problems engaging contractors to do work in the future.
Philip Manley, ex-HMRC inspector and industry expert, says that “every year, HMRC enquires into thousands of tax returns completed by UK taxpayers. If there is an error leading to a loss of tax, HMRC will often apply a tax-geared penalty for failure to take reasonable care.”
There are three possible circumstances that could incur a penalty should clients not take reasonable care, as according to the SDS:
- where the taxpayer makes a careless error (in providing information to HMRC);
- when a third-party supplies information that is false or deliberately withholds information; or
- when a taxpayer fails to notify HMRC that an assessment is too low.
“Reasonable care is a tightrope,” says Manley. “Though there is no official guidance on how it applies to clients with regards to IR35 status determinations, it’s clear that HMRC is not averse to using the argument when it believes tax to be due.”