9th February 2021
Background and purpose
As you probably already know, with the IR35 reform this coming April, contractors that operate through a limited company (PSC) will not be able to determine their IR35 status. The responsibility will go to the end client.
In the 2020 finance bill, lawmakers introduced an amendment to the reform that requires companies to issue a Status Determination Statement (SDS) to each contractor. The statement has to confirm the decision and the reasoning behind it.
The purpose of the document is to mitigate the risk of non-compliant assessments such as role-based or blanket determinations, which we have seen plenty of at the beginning of 2020.
When can you expect a statement of your own?
Private sector organisations will start or have already begun issuing SDSs to their contractors whose assignments run beyond April 2021 or to those that are about to take on a new role that extends beyond that date.
It is important to mention that the rules only apply to medium and large-sized organisations with an annual turnover of more than £10.2m or over 50 employees.
The assessment and reasonable care
The legislation points out that hiring organisations have a responsibility to take reasonable care when making a decision. As long as proper care is taken, companies may conduct reviews internally using the Government’s CEST tool, use a third-party tool or outsource the entire process to an outside firm like Qdos or Kingsbridge.
The term “reasonable care” has come under criticism for being overly vague and some called it a “tightrope”. Thankfully for anyone confused, the Government created a manual that sets out a number of guidelines to follow:
- Use the Government’s CEST tool for status determination.
- No blanket assessments – must look at each contractor individually.
- Working practices mirror the written contract.
- Keep records of the decision – these may be required for an investigation.
- Have resources dedicated to the assessment and appeal process
- Review processes regularly
- Ensure that the SDS is communicated to every member of the supply chain
When the above requirements for an SDS are not met, i.e. “reasonable care” has not been taken, the client assumes the role of the fee-payer (a role normally held by the agency) and becomes liable for the deduction of tax, NI and, if any, taxes that are deemed unpaid as a consequence.
What should you do after receiving your SDS?
Review the statement and ask questions if you have concerns about the outcome. You can also have your own assessment done either using CEST or a third party expert like Qdos.
If you disagree with the result, you have the right to appeal in writing, to which your client must respond within 45 days. Failing to do so may result in them becoming the fee payer and liable for deemed tax and NI deductions.
Should the original result still stand, the end client must provide evidence behind why this is the case.
In case of a successful appeal, the company must issue an entirely new SDS with the appropriate amendments included.
The status decision
If your statement says, you are deemed inside IR35 you have a few options, although you may not be offered all of them.
Go permanent. Your client may decide to offer you a permanent position as an employee where you’ll be paying tax and NI through the PAYE system. You’ll enjoy the security of permanent employment but may have to give up some of the freedom freelancing provides.
Go umbrella. If your client feels that a temporary workforce is more advantageous for them, they will ask you to seek an umbrella provider’s services. As you continue with your engagement, the umbrella company will act as an intermediary and your employer, taking care of your tax and NI deductions. You’ll have full employment benefits; insurance included and all your admin responsibilities will be handled for you.
Continue with your limited company inside IR35. This is probably the least effective way of trading inside IR35 in terms of your take-home pay. You will pay more tax than an employee, as you’ll be responsible for both employee and employers NIC, not to mention the running costs and responsibilities of operating a limited company. Also, claiming expenses is not an option here.
With an outside IR35 decision, your life is a lot simpler. Continue with your limited company as before and enjoy the benefits of the most efficient trading method you can use if you are a contractor.
Compare your net pay
To see how all of the above scenarios affect your pay, visit our sister company SmartWork’s net pay calculator and download a copy of the results. The calculator is quite detailed, and you’ll be able to see the results side by side.
We hope this guide helped with your questions, and if you are affected by the IR35 reform, feel free to get in touch with us. Our companies have been around for two decades, helping contractors. Our FCSA accreditation is a testament to our compliance and service quality, so whether it’d be accounting or umbrella services you require, we can help.