IR35: Making the decision and issuing the Status Determination Statement

When looking at IR35, most of the articles I have written consider things from the Personal Service Company (PSC) contractor’s point of view.  But it is the businesses dealing with the hiring and firing that are going to be making important decisions about the Status Determination Statement (SDS) and I therefore thought it might be useful to look at things from their standpoint.

As I’m sure you are now aware – there are big changes coming and getting it wrong will be an expensive mistake.  Many large businesses have already taken the decision not to take on PSC’s in the future and to either employ the individuals direct or offer them the opportunity to carry on contracting through an Umbrella Company.  This option will remove the potential risk of getting the decision wrong on the Status Determination Statement, but may well reduce the flexibility of the workforce you can engage.

Therefore, it might well be that there is an opportunity for companies who are willing to make the IR35 in or out decisions on a case-by-case basis, to have a better quality of contractor above those competitors who are not willing to make those decisions.

What should you be thinking about when preparing a Status Determination Statement (SDS)?

You will be required to assess all of your contractors working as PSC’s and issue an SDS to them or to the fee payer in the chain which might be an agency.  Once issued, the PSC will be able to come back to you and ask for clarification on the decision.  You will have 45 days to answer any questions raised by the PSC and either change the SDS decision or stand by the original SDS.

The contract that is in place would be important to review in the first instance.  This should be assessed and considered if it is a true reflection of the work practices that are actually in place.  Consider if the contract talks about a substitute being sent if this would actually be allowed.  Many contracts have been written with standard terms which cover the relevant areas to get a PSC contractor out of IR35.  You should consider if the contract terms are a true reflection of work practices as this is the approach HMRC would take were they to review your SDS’s.

Once you have considered the contract, you might run this through HMRC’s Check employment for tax online tool (CEST) to see what decision this gives you.  HMRC have stated that they will not challenge the result as long as the questions have been honestly answered.

Care should be taken with the CEST tool as it does not take into account Mutuality of Obligations which is a major point in deciding if a PSC is caught by IR35.

The main things for consideration when preparing an SDS will be:

• Is personal service required or can a substitute be sent
• Is there a mutual obligation to offer and accept work
• Is the contract for a specific task or project
• Does the contractor have specialist knowledge for a specific area
• Is the contractor controlled as to how they carry out their contract work
• Does the contractor provide and use their own equipment
• Is there financial risk in the contract
• What is the length of the engagement and has it been renewed
• Is the contractor an integral part of the organisation
• Does the contractor enjoy any employee type benefits
• Does the contractor have the right to supply services to others

This is by no means an exhaustive list but covers the main areas.

Lambert Chapman LLP can assist you in deciding if your PSC contractors are inside or outside IR35 and in issuing them with SDS statements. Please contact Duncan.forsyth@lambert-chapman.co.uk if you would like to discuss any IR35 issues.