Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
Markel Tax

15 Mar 2021

IR35: What do businesses need to do to protect themselves?

End-client businesses which engage contractors (whether directly or indirectly via agencies) must determine whether or not they are medium or large-sized businesses for the purposes of the IR35 legislation. If they are, they must:

  • Make a status decision for each and every engagement of a contractor via a PSC

  • Demonstrate reasonable care in its decision-making process

  • Communicate that decision to the relevant parties* via a Status Determination Statement (SDS) which gives reasons for the decision

  • Create and operate a ‘client-led disagreement process’ for any challenges to the SDS by a contractor.  These challenges must be responded to within 45 days and give a “reasoned response”.

How do I determine if my business is small, medium or large-sized?

A small company is defined as:

  • Turnover of no more than £10.2 million

  • Balance sheet total of no more than £5.1 million

  • No more than 50 employees (ESM10006)

Two of the three criteria above must be met for you to be defined as a small company. If you do not meet this criteria you are responsible for the determination of the IR35 status.

Many companies will find this easy, but construction companies in particular might find this particularly difficult. Often one completed contract may take the companies turnover to over £10.2m million and make those companies liable for IR35 decisions.

Note: The Companies Act definition doesn’t apply to unincorporated businesses. HMRC has confirmed that unincorporated entities need only consider the turnover test.

What is a Status Determination Statement (SDS)?

From April 2021, under the new rules, it is the responsibility of the end-client to establish whether or not a contractor engagement is caught by IR35. Previously, the contractor’s limited company was left to decide this determination. The end-client must make this determination and issue a Status Determination Statement (SDS).

The legislation requires that the end-client must take reasonable care in making this determination and that the SDS must include a conclusion and reasoning for that conclusion.  This SDS must be passed to the next contracting party closest to the client in the chain and directly to the individual contractor.

It is imperative you examine your contractor workforce and gather the information needed to make a decision on IR35.  To will require knowledge about IR35, otherwise you won’t know what information needs to be gathered.

It is also imperative that you pass the SDS to the individual contractor and to the next party in your contracting chain, if you do not then you will remain the ’fee payer‘ with the associated responsibilities and potential tax liability, unless or until this SDS is delivered to the correct parties.

N.B. While you do not have to issue a formal Status Determination Statement (SDS) before 6 April 2021, if you choose to do so it will be valid from 6 April.

Do we have to complete a SDS for each and every contractor?

The short answer is 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 determination for a group of workers, providing the workers are engaged under the same contractual terms and conditions and, in practise, 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).

Can we use HMRC’s CEST to determine the IR35 status?

In our opinion, the CEST doesn’t 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, however, 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.”

How can I protect my business and ensure I have taken the right due diligence?

As an end client, the new IR35 provisions will undoubtedly have an impact on your business and you will need to navigate the complexities of the legislation and case law. If you’re a fee-paye” you will be the one liable for any unpaid tax. Even if you’re not the one paying the contractor directly, you may still be liable if you have failed to take ’reasonable care’ when determining the IR35 status.

It is therefore vital that you take the correct due diligence, and where you are the fee-payer, ensure you are protected against HMRC enquiries.

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Our FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What’s more, we’re able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.
Tagged IR35
Next article in series

15 Mar 2021

What is IR35 and what is happening on the 6th April?