STATUS DETERMINATION STATEMENT: OFF-PAYROLL EXPLAINER FOR APRIL 2021
The off-payroll framework is fast approaching, there are still two of the key requirements of the new IR35 legislation from April 2021 which seem to be shrouded in mystery, the main legislative obligations placed on end-client businesses:
- the production of a Status Determination Statement (SDS)
- and the implementation of the end-client’s "Disagreement Process."
SDS: in a nutshell
The legislation places three requirements on the SDS itself:
- It must confirm whether an engagement is within IR35 (subject to tax and NI) or outside of IR35 (akin to self-employment).
- It must provide an explanation for this decision.
- It is only valid if the end-client business has taken 'reasonable care' in arriving at that decision.
The legislation does not, however, specify the tests for employment or self-employment which need to be undertaken (i.e. how to decide if IR35 applies), nor does it provide any definition of "reasonable care".
The HMRC does set out an interpretation of what "reasonable care" is within the Employment Status Manual (at ESM10014). However, this is only HMRC’s interpretation, which is not the same as a requirement enshrined in legislation.
The legislation further stipulates that the client must provide the SDS to the party it contracts within the supply chain as well as to the worker of the limited company at the end of the chain.
Importance of providing the SDS
The end client is classified as the 'fee-payer' for the purpose of the legislation until they issue an SDS to the worker and to the next party in the chain, they will be responsible for all potential liabilities associated with being the 'fee-payer'.
Once the SDS has been passed to both parties, and it has been produced with "reasonable care" the end-client will be released from this burden. Effectively, the legislation places the holder of the SDS as the "bearer of liability".
What is reasonable care?
Broadly speaking, 'reasonable care' means taking actions and decisions which are not careless, reckless or deliberately false.
In the context of IR35 decision-making, we can conclude that to be certain 'reasonable care' is being taken, one must examine the contracts and the working arrangements of each contractor, and have an understanding of the law which determines whether or not IR35 applies.
HMRC’s view appears to be similar, they do make the point that they would expect better compliance from say a ‘Plc’ than they might from a medium-sized business without its own legal department.
Ensuring compliance will not be a small feat for end-client businesses, and a number of actions have been taken by end-clients over the last twelve months, including:
1. Blanket decision not to use PSC contractors
The end-client business will be outside the scope of the legislation entirely – if no limited company contractors are engaged then there are no legislative requirements to comply with. This action is most prominent in the banking sector.
While this action eliminates the IR35 risks, we foresee that there may be real commercial difficulties for businesses that take this route.
2. Blanket decisions when outside IR35
This will leave the end-client business with significant problems, as there would likely be a failure in the 'reasonable care' requirement.
If a blanket decision is used, without individual consideration for each contractor’s terms and working practices, then this simply will not comply with the legislation.
One of the overriding principles in law, and from every employment status and IR35 decision, is that each case must be decided on its own merits, based on its own facts.
3. Outsource compliance with Genius Money
Engaging with Genius Moneys specialist services will satisfy the 'reasonable care' requirement. As an IR35 specialist with the requisite skills and knowledge to produce the SDS on the end-client’s behalf we can successfully protect and ensure that your business is fully compliant.
What should an SDS look like?
The legislation does not give a prescribed format and while HMRC has provided guidance on the applicability of the legislation, and has developed its CEST tool further, no detailed guidance exists as to what form a SDS should take.
HMRC’s guidance simply restates the legislative obligations and directs end-client businesses to keep 'adequate records' of any and all decisions.
In Genius Money's opinion, an SDS should contain:
1. A clear statement that the engagement is inside or outside IR35
It should be immediately clear to the contractor and the agency what the decision is without any ambiguity and without having to read through an entire report to find the decision.
2. A clear explanation and what the decision means
There is no need for an extensive explanation on why the decision has been reached, it does not need to reference every IR35/status case that has ever been heard!
It should explain in simple terms what factors were considered (Personal Service, Mutuality of Obligation and Control as fundamental factors, as well as ‘In-Business’ factors, etc). It should explain how the contracts and working practices demonstrate that the legal requirements have or have not been satisfied.
If the contractor does not understand the reasoning behind the decision, then it can lead to much more time and expense for the end-client if the contractor disagrees with the decision and challenges it.
It may seem absurd to think that contractors or agencies don’t know what the consequences of IR35 are, but it is better to be safe than sorry.
This is more so because many companies and advisers use different terminology “caught”, “not caught”, “employed”, “inside”, “outside” among others. It is advisable, therefore, to overstate the consequence of the decision that has been made.
4. Details of the disagreement process
The SDS should also include a statement which directs the contractor to a point of contact if they do not agree with the decision.
When should the SDS be sent?
From April 6th 2021 end-clients should issue the SDS as soon as is practically possible. Ideally, before any engagement begins. This is because until the SDS is produced and sent to the correct parties, the end-client business is in the frame for any potential liability as the fee-payer.
Clients ought to note, however, and contractors should beware that an SDS must be produced for every engagement, any change in working practices or contracts then a new SDS must be produced.
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