When clients reverse your contractor IR35 status overnight

You’re happily working under a contract whereby your end-client has deemed you to be genuinely self-employed and thereby ‘outside’ IR35, writes Andy Vessey, head of tax at Kingsbridge.

Shock horror however, when your client suddenly has a change of heart and presents you with a revised Status Determination Statement (SDS), which overturns your employment status and now concludes you are caught by the off-payroll rules. Now you are facing a severe cut in your income, so what can you do?

A practical 101 when outside turns to inside

The new SDS will give the reasons for concluding an ‘inside’ IR35 decision but first port of call is to have a conversation with your client to fully understand what significant change in the contractual and/or working arrangements has brought about this sudden change of mind.

You can then evaluate any new evidence and consider whether or not the client has properly applied the relevant tests of employment status to support their conclusions.

Where an agency is involved in the contractual chain and they are responsible for making tax and NIC deductions (known as the deemed employer), then the client will have issued them with a copy of the new SDS. Indeed, you may have been passed your copy from the agency.

Talk, appeal, point to legislation

Have a conversation with them to ascertain whether or not they agree with the new SDS. If they disagree with the decision and are willing to fight your corner, then a joint-appeal can be lodged against the decision with the client. Even if the agency is unwilling to participate in such action, a contractor is not precluded from forging ahead with such an appeal.

Remember, S.61T, Chapter 10, ITEPA 2003 requires clients to have a Status Disagreement Process in place to deal with disputes, and as a minimum the client is required to:

• consider representations by the worker and/or the deemed employer, made either verbally or in writing;
• respond to those representations within 45 days of receipt;
• inform the worker and/or the deemed employer that after considering their appeal they either uphold the appeal and provide a new SDS and state that the previous SDS is withdrawn or confirm that they stand by their decision; and
• confirm they have taken ‘reasonable care’ in making any new SDS.

Their pain of not playing ball

Failure by the client to comply with these requirements will render them responsible for operating PAYE, where appropriate. So there really is sufficient incentive for them to play ball.

There is no cap on how many times a worker or deemed employer can still make representations, so even if the first appeal fails, subsequent appeals can still be made right up until the final payment is made.

Counter arguments

It is likely that you may need to provide a compelling argument to persuade the client that they have erred in either interpretation of the facts, incorrect application of the relevant status factors, or both.

In the first instance, consider running all the current facts through a reputable automated status tool to establish any differences between the two parties’ views. If favourable, then present this as part of your representations to the client. If this fails to hold any sway, then it may be prudent to engage the services of an IR35 expert to provide you with an independent assessment of your contractual and working arrangements.

Should that external IR35 specialist concur with your own view, then introduce their full written opinion in your subsequent appeal and request a meeting with the relevant client representatives, so that you and your adviser can properly discuss the salient points. You may consider this action to be your first port of call rather than using a status tool, depending on your view of costs.

Flogging a dead horse

Despite your numerous appeals, if the client is not for turning and therefore the disagreement process has been exhausted, you do have one final course of action to fall back on but it comes with a hazard warning – IR35 enquiry ahead!

If you have the courage of your convictions, then you can, as a last resort, follow the existing Self-Assessment and National Insurance process to obtain a repayment. This however will inevitably result in an HMRC enquiry, and you must therefore be prepared for the long fight as the Revenue will set great store by end-client evidence. So you are likely to need an IR35 expert by your side, and while this may all seem difficult it is not impossible!