Changes to off-payroll (IR35) working in the private sector are coming into effect from 6th April 2021. While this doesn’t mean the end of contracting through a limited company, it does mean that the supply chain must work together to ensure HMRC compliance is satisfied. With April approaching quickly, our latest blog looks at Status Determination Statements (SDS) and provides an overview of what they are, and why they’re so important.
Off-payroll in the private sector (IR35)
Amendments to off-payroll legislation in the private sector were originally scheduled to roll out in April 2020. However, due to the coronavirus pandemic, the government announced they were delaying the legislation for 12 months – to give the entire supply chain of temporary workers more time to come to terms with the changes, enabling them to be fully prepared.
From April 2021, limited company contractors (operating through a personal service company) working in the private sector will no longer be able to determine their IR35 statuses. Instead, this will become the responsibility of the private sector end-client. This concept is not new. The government rolled out similar legislation in the public sector in 2017.
Status Determination Statements (SDS)
The Finance Bill 2020 included amendments to IR35 and one of the key inclusions was the requirement for end-clients to create a document called a Status Determination Statement (SDS).
An SDS document showcases how a client has come to an IR35 decision for each of its temporary workers. Within the document, the end-client must state what the contractor’s employment status is (whether they’re inside or outside IR35), and the reasons for this decision must be made clear.
End-clients must take “reasonable care” when determining the IR35 statuses of temporary workers
The introduction of SDS documents means that end-clients must make individual assessments, rather than make a single blanket decision that will impact all of their temporary workforce. For an SDS to be valid, the governments website states that end-clients must “take reasonable care” when they “make a determination about the employment status of a worker.”
Suppose an end-client fails to produce an SDS that meets the governments criteria. In that case, they will assume the position as the contractor’s “fee-payer” – even if the agency or another body within the supply chain has this role. As mentioned on the government’s website, if an end-client fails to take ‘reasonable care’, it “will result in the worker’s tax and National Insurance contributions becoming your [the end-client’s] responsibility”.
The government has created an employment status manual that is designed to help end-clients understand what ‘reasonable care’ means. From what we’ve seen online and especially on the government’s website, ‘reasonable care’ means that the following should be adhered to. However, this list is not definitive or official:
- Individual assessments – no blanket decisions or guesses.
- Using the government’s own CEST tool.
- Ongoing assessments for every temporary assignment.
- Ensuring the working practices are in-line with the written contract.
- Proof obtained for each decision – which may be required if HMRC investigate in the future. End-client will need to be able to justify their assessments for all workers.
- Dedicating significant time and resources to understanding and implementing the legislation – as intended.
- Communication with the supply chain, and the passing on of SDS’s to the agency and contractor.
- Checking assessments continue to be accurate down the line.
- Reviewing processes frequently.
More information is available on the government’s website.
Philip Manley, an ex-HMRC inspector, has shared his thoughts on ‘reasonable care’. He said:
“Reasonable care is a tightrope.”
“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.”
Examples of ‘reasonable care’ in practice
The government’s online employment status manual includes two examples of companies that have and haven’t taken ‘reasonable care’ with their employment status assessments.
Example: Taking ‘reasonable care’ in employment status checks
The following is an example created by the government to show an organisation that has taken ‘reasonable care’ when conducting employment status checks.
“A large-sized company needs to make an SDS in relation to the off-payroll working rules. It ensures that those making the SDS have a good understanding of the working arrangements to which the SDS relates. It also ensures that HMRC guidance on employment status is applied and CEST is used in accordance with guidance and answered accurately based on the information they have.
The business has staff in similar roles but where the terms and working practices do differ. The business ensures that the determination for this role is based on its own facts and does not determine the outcome based on the other roles.
As the company has taken prudent and reasonable steps when determining whether the off-payroll working rules apply, it would be considered to have taken reasonable care.”
Example: Failing to take ‘reasonable care’ in employment status checks
The scenario below has been taken from the government’s website. It shows an end-client that has not taken ‘reasonable care’ in its employment status checks on temporary workers.
“A medium-sized company engages an agency to supply workers. The workers supplied by the agency operate through their own PSCs. The client decides not to take any steps to prepare for the introduction of the off-payroll working rules. It elects to simply determine that all workers who provide their services through a PSC will be caught by the new rules, because they undertake similar roles and are engaged under similar terms and conditions. It does this, believing that this will protect it from any liability to pay tax and NICs on payments to those workers. The client passes the same SDS to every worker and the agency.
Even though the client has determined that the off-payroll working rules apply to the engagement, and passed on the SDS to the worker and agency, as the company has not taken prudent and reasonable steps when making their determinations, liability rests with it. The client has not considered the status of the workers contracting under different terms and conditions, so it has not satisfied the condition to take reasonable care. The responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due rests with the client.”
What should limited company contractors do in regards to Status Determination Statements?
End-clients have had plenty of time to prepare for the changes to off-payroll working in the private sector. Not only was the announcement made well in advanced of the original roll-out date (April 2020), the legislation has been delayed for 12 months as a result of COVID-19.
If you are a contractor working in the private sector through a personal service company (PSC), you should have been issued with an SDS if your assignment runs into or beyond April 2021. And, if you’re about to take a new role, you should be issued with an SDS before signing the contract.
Ultimately, it is the end-client’s responsibly to take ‘reasonable care’ with their employment status assessments. However, we recommend giving each SDS you receive a thorough review and do not hesitate to question anything with your end-client if you have any concerns. You may also be interested in obtaining guidance from a third-party specialist, such as an IR35 expert.
If you are a Churchill Knight & Associates Ltd client, we can help. If you would like your Churchill Knight Account Manager to contact your end-client on your behalf, please give them a call or send them an email. Alternatively, please contact your Account Manager if you have any questions or are uncertain about anything related to off-payroll in the private sector (IR35).
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