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Business Tax  •  HMRC  •  Personal tax

IR35 Update: Understanding the SDS (Status Determination Statement)

By RJP LLP on 29 August, 2019

The IR35 rules for off payroll working are changing on 6th April 2020 for contractors and consultants who work in the private sector for large entities. These changes will mean that personal service companies (PSCs) engaged by large entities will no longer be liable for IR35 taxes, but the entity paying the PSC will instead be liable.

Although the IR35 tests themselves will not change, the party liable for the tax and NIC, should IR35 apply, does change from April 2020 for large engagers.  The new legislation also introduces the need to provide a Status Determination Statement (SDS).

This article explains what the SDS is, how it is operated and what the changes mean. It is relevant for both contractors and for large organisations who engage the services of independent contractors.

 

What is the SDS?

Under the revised form of IR35, the engager (the end client) must decide whether each of their service company suppliers are caught by IR35 or not. They can use the online HMRC tool, CEST, to establish this.

The engager must notify the supplier, in a status determination statement (SDS,) whether they are caught by IR35. This SDS should also explain the reasons.

If the engager doesn’t provide an SDS then the engager will always be liable for IR35 duties.

 

Where complications arise – links in a chain

In situations where the engager is using an agency to supply the worker, so there is effectively more than one engager, the SDS is created by the end engager and passed down the chain until it reaches the engager  who is making the payment to the worker, and that engager becomes liable to deduct PAYE tax and NICs.

Note that the SDS does not pass all the way down to the end supplier service company, so IR35 tax will always be payable by the entity making the payment to the service company - the ‘deemed employer’.

To further complicate matters, the law allows any party in the supply chain to pass on a deduction they have suffered to the next party in the chain. However, employer’s NIC liability, as well as the apprenticeship levy liability, remain with the final, ‘deemed employer’.

According to the new IR35 rules, an SDS notification can be challenged by either the worker or the deemed employer. After a challenge, the engager has 45 days to either confirm, with reasons, why it either upholds the SDS. Alternatively, it can withdraw the notice and replace it with a revised decision.

 

What are the issues around IR35 and SDS?

One of the obvious issues for engagers is the risk of incorrectly judging a worker’s status.  This could mean they incorrectly create employer’s NIC and apprenticeship levy liabilities for themselves. They may also experience difficulties sourcing contractors because they will become the ‘messenger’, issuing notification to service providers that they are being “engaged as an employee’ without any employment rights”.

All parties in the supply chain will need procedures to ensure that an accurate SDS is issued, passed on to the correct parties at the correct time, and that any challenges to the SDS are dealt with and communicated properly. All this will need to be carefully documented in the case of any dispute over the tax liability.

IR35 is already a very complex area and these changes will initially make things more difficult for engagers and suppliers. If you have any questions, please contact us at partners@rjp.co.uk

 

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