A Status Determination Statement (SDS) is a document that sets out the status of a contractor for tax purposes. It is used to determine whether a contractor is inside or outside of IR35.
What is IR35?
IR35 is tax legislation that aims to ensure that individuals who work through their own limited company – but work in a manner akin to a ‘worker’ – pay the same amount of tax as if they were employed by the end client.
The original IR35 rules were first implemented in 2000.
However, new ‘off payroll working’ rules followed in 2017 (for public sector contracts) and April 2021 (for private sector contracts).
These new rules place the burden of deciding a contractor’s employment status onto end-clients, rather than the contractors themselves.
Who needs an SDS?
An SDS should be created by clients who engage contractors who work via an intermediary.
Unless your client is deemed to be a ‘small company’ under the Off Payroll rules, they should provide you with an SDS which states whether they deem the contract to be inside or outside of IR35.
They must take reasonable care when coming to their conclusion.
If a client fails to produce an SDS, or take reasonable care in doing so, they could be liable for any tax and NICs due from an assignment.
How do clients work out if a contractor is caught by IR35 or not?
Working out the employment status of a contractor has been a minefield ever since the legislation first came into play over 20 years ago.
So many variables make up the whole picture of an individual’s true status; both their working practices and the terms of the contract are taken into account.
The official employment status tool – CEST – has been widely maligned by tax status experts, as it ignores key components of IR35 case law, such as the Mutuality of Obligation, when calculating its results.
There are several long-established IR35 tax consultancies out there who can help clients determine the IR35 status of contractors – including our own partner, Qdos.
Unfortunately, if a client gets an SDS wrong, they could ultimately be found liable for any unpaid tax in the future, which has resulted in many blanket inside IR35 determinations by larger clients.
What information is included in an SDS?
Here is the information that is usually included in an SDS:
- The name of the contractor
- The name of the client
- The start and end dates of the contract
- The nature of the work to be carried out
- The amount of the fee
- The basis on which the fee is calculated
- A statement of the client’s view on the contractor’s status
- A statement of the contractor’s rights of appeal
The SDS – typically provided as a document or email – should:
- be passed to the worker and the person or organisation the client contracts with (usually a recruiter)
- give the client’s conclusion and the reasons for reaching it
What if I disagree with the SDS?
If you disagree with your client’s status determination statement, you can challenge it. You can do this by submitting a written challenge to your client. The challenge should explain why you disagree with the SDS and should provide evidence to support your argument.
The client will then have 45 days to respond to your challenge. If the client does not respond within 45 days, or if they do not agree with your challenge, you can escalate the matter to HMRC. HMRC will then investigate the matter and make a decision on your status.
In the real world, however, challenging your SDS could damage your relationship with the client. If you are not prepared to risk this, you may want to consider accepting the SDS even if you disagree with it.
Status Determination – Free Template
You can download a free SDS template from Qdos here.
For ultimate peace of mind and defence in the event of an IR35 investigation, take out Qdos’ award-winning IR35 insurance – from just £99 per year. This covers up to £50,000 of professional representation and potential tax liabilities up to your chosen level of indemnity.