What is a Status Determination Statement and why do you need to care? SDSs, as they're called, were introduced by the Finance Bill 2020 and require that clients provide an IR35 ‘status determination statement’ when assessing the IR35 status of their contractors. In essence it is a definitive statement from the client which does two things. It declares a contractor’s deemed employment status following an IR35 assessment (so whether they fall within or outside of IR35) and, secondly, it provides reasons for reaching that conclusion. They are important because ensure that end-clients make individual assessments, rather than making a single blanket decision affecting all the contractors and so, depending on how many contractors you have, getting these statements ready in time could involve a huge amount of work which is a point we will come back to shortly. Crucially, the requirement for an SDS will not be satisfied if the client fails to take ‘reasonable care’ in arriving at its decision. In that case the tax liability stays with the hirer, the end-user, so these statements really do need a lot of care and attention.
Of course all of this is in the context of the IR35 legislation coming into force for the private sector on 6 April – a new regime requiring medium and large sized businesses in the private sector to assess the employment status of those contractors who provide their labour through their own intermediary and, if appropriate, operate PAYE and NICs.
As you may know, this legislation was originally planned to come into force in April last year and many of our clients had prepared well for that and made their assessments. That was before the pandemic and a lot has changed since then so the question we have been asked by a number of clients is do those need to be reassessed if we continue to use those contractors, or will they now fall outside IR35? To help with that, tax specialist Penny Simmons:
Penny Simmons: “That's a difficult one, it's a difficult one to answer, and when clients ask me about employment status determinations for tax purposes determinations for IR35 I always say I wish I could give you a hard and fast set of rules, a hard and fast definition, to work out whether somebody is an employee for tax purposes. The reality is that there is no specific definition and the courts will look at, the Revenue will look at, a number of factors when determining whether somebody is an employee for tax purposes. Now, some of those key factors, if you like, are looking at whether the individual consultant can provide a substitute if they're not able to work, the extent of control that the business has over the work that the consultant does and the way that the consultant does it and whether there is this idea of mutuality of obligation, whether the business is obliged to provide work and whether the consultant is obliged to accept that work. Now those three factors won't have massively changed with people working from home. With people working from home, the realities won't change. What will have changed are the other factors that can weigh in to the question as to whether somebody is an employee for tax purposes. So for example, the Revenue might look at how integrated an individual is within an organisation and to do that they might look at whether the individual would be invited to the Christmas Party, has access to the canteen that only employees have access to, is invited to regular team catch ups. Now the reality is everybody's working from home at the moment there hasn't been a Christmas Party, there aren't regular drinks for employees, employees don't have access to a canteen that's only reserved for employees. So you can't use those factors to try and say, well, somebody is self employed as opposed to an employee for tax purposes because nobody has access to those to those at the moment. So, yes, I think there are differences as to where we were a year ago, when the entire workforce wasn't working from home, however, they are, if you like, temporary, and I think that, ultimately, when you look at employment status for tax purposes in the round, the factors that are relevant, there hasn't been a massive shift in those factors and I don't think there'll be a massive shift in somebody who would have been an employee for tax purposes a year ago, and whether they're an employee for tax purposes today."
Joe Glavina: "On the preparation of the SDSs, is it HR's job to get those ready, and how labour intensive is that likely to be?
Penny Simmons: "It's an interesting question. Is it for HR to conduct the SDS? That will depend on the business and how the business is organised and how its compliance function is organised and it may well be the HR team that undertakes the status determinations and issues the Status Determination Statements. Alternatively, a business may have an internal tax team with employment tax specialists within that internal tax team and they may say, look, you know, this is one for us, we're going to make the status determinations and we'll issue the SDSs, the Status Determination Statements. So I think it will depend on the business and there are no hard and fast rules there. And remind me, what was the second question?
Joe Glavina: "How labour intensive is it likely to be getting the statements ready?
Penny Simmons: "Again, how labour intensive that task is going to be is going to depend on a number of factors and it's going to vary from organisation to organisation. I mean, the first thing will depend on how many contractors, or consultants, engaged through intermediaries a business actually works with. You've got some businesses that work with one or two and so the process of working out whether they are employees for tax purposes and issuing them with a Status Determination Statement, which could be as simple as an email, there is no set form of what an SDS should look like, well that's going to be a relatively simple process, they've got a couple of people. Contrast that with an organisation that has say 10,000 contractors engaged through intermediaries who are all going to require a status determination and they're all going to require a Status Determination Statement. I mean, that's a huge exercise and businesses of that type have been looking at this for a long time now and making sure that they are fully prepared because it's a huge compliance process and they need to make sure that they have the processes in place to deal with."
Joe Glavina: "Last question Penny. If it is a huge process, which it will be for some, can the end-client simply outsource it?"
Penny Simmons: "Interesting question and something that I've been asked a lot over the last 18 months or so. In law the responsibility for making the status determination and issuing that Status Determination Statement sits with the engager, the end client, the business who would be an employer for tax purposes. Can you outsource that? There's nothing strictly speaking to prevent you from outsourcing it, however the legal risk sits with the client, sits with the end user. So if they were to outsource it, they're not necessarily outsourcing risk, they are simply outsourcing the process and inherently that is going to present some risk to the business if the business would make a different determination that the outsourcer would have made. So that's a complicated question and not one that really I can answer in general terms. It's something that businesses would need to think about, if it's something that they're looking at, and they would need to weigh up the varying risks that such an arrangement would pose for them."
Finally, you may have seen the headline in the HR press last week about the government waiving IR35 penalties for one year – both Personnel Today and People Management covered that. Earlier in the week Penny talked to this programme about that, explaining why that’s not really news given what the Revenue has been saying in recent weeks. That programme – ‘IR35 one year penalties waiver ‘not unexpected’ - is available for viewing now on the Outlaw website.