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Markel Tax

19 Apr 2021

What can a contractor do if they don't receive a status determination statement?

We recently received a number of calls asking what rights a contractor has if the client refuses to issue a Status Determination Statement (SDS) but instead simply tells them they are caught by IR35 and the contractor disagrees with that view? 

As usual, the first thing to do is to check the legislation.  This is clear in showing the contractor’s rights if they disagree with an SDS that has been issued.  It was less clear on what happens where a decision is offered but without an accompanying SDS.

Is a verbal statement enough to create a valid SDS?

The first question is whether the opinion expressed is actually a formal SDS.  Section 61NA ITEPA 2003 shows that an SDS is a statement by a client which states that they have concluded that IR35 does or does not apply and gives reasons for that decision.  That section then goes on to state that:

a statement is not a status determination statement if the client fails to take reasonable care in coming to the conclusion mentioned in it”.

While this does not require an SDS to be in writing, it seems sensible to use a written format to evidence the reasons for the decision and that reasonable care was taken.  HMRC guidance makes clear that the SDS should be retained in accordance with normal rules on retention of payroll documents which suggests that some written record needs to exist although this may only show the information not how it was presented to the contractor.

Returning to the question, simply telling a contractor that they are caught by IR35 without giving reasons for the decision does not create a valid SDS as it does not show how the decision was reached.

Is the client required to issue an SDS?

The reason why an SDS hasn’t been issued may be that the client is not obliged to do so. Remember that private sector clients who are not classed as large or medium entities are exempt from making status determinations.  In those cases, the contractor can make the decision on the application of IR35 themselves, just as they do under the current rules.  Of course, the contractor may not know if the client is a small entity or not.  HMRC guidance says that:

“If the client does not issue the SDS, the worker can ask why. Under the off-payroll working rules a worker has the right to request confirmation of a client’s size” (HMRC Employment Status Manual ESM 10012)

The contractor should make clear in their query that they are seeking clarification of the client size for purposes of the IR35 legislation as specified in section 60H Chapter 10 Part 2 ITEPA 2003 and the client has 45 days to respond.  HMRC guidance goes on to say:

“If the client does not respond confirming its size within 45 days of receipt, the requestor can apply to the courts for an injunction (or an order for specific performance in Scotland), requiring the client to provide the information which will come with consequences if not adhered to.” (HMRC Employment Status Manual ESM10011A)

What can the contractor do?

The client has told him that he is caught but not in a way which creates an SDS.  Although the legislation is unclear HMRC guidance shows that:

“If the client did not issue an SDS, the worker or deemed employer can still make representations.  However, the normal 45-day time limit will not apply. The client will be responsible for any deductions of tax and NICs and payment of apprenticeship levy if the engagement is one to which the rules apply so HMRC recommend the client does consider any representations received.” (HMRC Employment Status Manual ESM10015)

So, the client has to respond, but only at some indeterminate time in the future.  That is not particularly helpful, and it would be for the courts to determine what would be a reasonable timeframe for the required response. 

The legislation is clear that where an SDS is not issued, but should have been, the liability to deduct income tax. NIC and any apprenticeship levy moves from the fee payer to the client.  However, in this case, the client is saying that IR35 is due and is already facing a cost for funding those payments either directly or through the fee payer if one exists.  This doesn’t create any incentive for the client to create a proper SDS or to reconsider their view.  The contractor has no other way to enforce matters.  On top of which HMRC probably don’t see it as a priority as they are getting the employment tax and NIC.

There is one way that the contractor can get HMRC to review the position.

 “Where, after completing the client’s status disagreement process, a contractor still disagrees with the client’s determination and they consider they have been taxed incorrectly as a result, the existing Self-Assessment…and National Insurance … processes can be followed”. (HMRC Employment Status Manual ESM10015)

This refers to the internal HMRC processes for refunding tax and NICs, but it would be triggered by a self-assessment return.  The contractor would have to complete their tax return as if IR35 did not apply and make a note in the white space explaining what they had done, why they had needed to complete the tax return as they have and that it was to trigger an HMRC review of their IR35 status.  It is important that the white space note be made to avoid HMRC considering a deliberate error in completing the return had occurred.

Final thoughts

This article highlights one of the weaknesses with the legislation, and what contractors can do if they do not receive a written SDS or remain uncertain of their position.  It is clear, from the calls we are receiving, that contractors themselves are actively engaged with this legislation.

It is hoped that the majority of end-client business will engage with the legislation by making a determination and issuing an SDS in writing.  In our opinion this is the best defence to demonstrate reasonable care and protect themselves against HMRC enquiry.

Speak to our team today

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.

Markel Tax’s 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 are 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 Status IR35 Construction
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What can we learn from Kaye Adams’ IR35 victory?