A Status Determination Statement (SDS) is a document produced by a client which sets out their decision on whether a contractor’s engagement falls inside or outside IR35. It forms part of the off-payroll working rules and must explain the reasoning behind the client’s determination.
What is IR35?
The aim of the IR35 rules is to ensure that people who work via their own limited company but work in a similar way to normal workers are taxed in a similar way to employees.
The original IR35 legislation was introduced in 2000 and is often referred to as Chapter 8 of the tax rules.
Under these rules, a contractor’s limited company is responsible for determining whether a contract falls inside or outside IR35.
New off-payroll working rules were introduced in 2017 for the public sector and extended to the private sector in April 2021.
These new rules (commonly referred to as Chapter 10) shifted the responsibility for determining a worker’s IR35 status from the contractor to the end client in many cases.
If the off-payroll rules apply to an engagement, the client must produce an SDS, with reasons explaining their decision.
Who needs an SDS?
An SDS must be produced by the end client when they engage a contractor who works through an intermediary, such as a limited company.
If the client qualifies as a medium or large organisation under the off-payroll rules, they must provide the contractor with an SDS stating whether the engagement is inside or outside IR35.
If the client is classed as a small company, the original IR35 rules still apply, and the contractor’s company remains responsible for assessing IR35 status. There is no requirement to produce an SDS.
When producing an SDS, clients must take reasonable care in reaching their conclusions. If they fail to do so, they may become liable for any unpaid tax and National Insurance contributions.
How do clients determine IR35 status?
Determining whether a contractor falls inside or outside IR35 has been a complex issue ever since the legislation was first introduced over twenty years ago.
A number of factors are considered when assessing employment status. Both the written contract and the contractor’s actual working practices must be examined.
The official HMRC employment status tool – CEST – is widely used by organisations. However it has been criticised by many tax specialists because it does not fully consider certain aspects of employment status case law, including the principle of Mutuality of Obligation.
Many organisations, therefore, rely on specialist IR35 advisers to assess status and review contracts.
One such consultancy is our long-term partner Qdos.
Because the client may ultimately be liable for any unpaid tax if an SDS is incorrect, some organisations have responded by issuing blanket “inside IR35” determinations for contractors.
What information is included in an SDS?
An SDS typically includes the following information:
- The name of the contractor
- The name of the end client
- The start and end dates of the engagement
- A description of the work being performed
- The basis on which the contractor is paid
- The client’s conclusion on IR35 status
- The reasoning behind that conclusion
- Details of the contractor’s right to challenge the determination
The SDS should be provided to both the contractor and the organisation that the client contracts with (usually a recruitment agency).
What if I disagree with the SDS?
If you disagree with the client’s Status Determination Statement, you have the right to challenge it.
You can submit a written disagreement explaining why you believe the determination is incorrect and providing supporting evidence relating to your contract and working practices.
The client must respond to this challenge within 45 days. They must either:
- confirm that the original SDS stands and explain their reasoning, or
- issue a new SDS if they accept that the original determination was incorrect.
In practice, challenging an SDS can sometimes strain the relationship between a contractor and their client. Some contractors, therefore, decide not to dispute a determination even if they disagree with it.
If you want to understand the potential financial impact of an inside-IR35 decision, you can estimate the difference using our IR35 calculator.
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