How to make a Status Determination Statement challenge as a contractor

Since the off-payroll working rules were introduced on April 6th 2021, issuing a Status Determination Statement (SDS) to every single limited company contractor they engage has been a requirement for medium and large-sized businesses (and all public sector bodies).

But how do contractors challenge determinations they believe to be incorrect? Here, exclusively for ContractorUK, I will outline the process and practicalities of challenging ‘incorrect’ Status Determination Statements, writes David Harmer, associate director at Markel Tax.

But firstly you need to understand your SDS obligations.

HMRC guidance on SDS

The legislation is vague here unfortunately, on both SDS content and the required ‘client-led disagreement process’ to respond to contractor challenges.

However, HMRC’s Employment Status Manual offers guidance on both issues. At ESM10013 we read that for an SDS to be valid, the client must:

• state whether or not the worker is/would be an employee or office holder for tax and NICs purposes if directly engaged by the client,
• provide reasons for coming to that conclusion, and
• take reasonable care in coming to their conclusion

And from ESM10014, HMRC says that the bare minimum expected of every client is to:

• review the contractual documentation,
• review the working practices, and
• produce a Status Determination Statement, which ESM10013 explains:

“Must contain reasons why the client has come to its conclusion…”  and include the “relevant considerations made to provide sufficient clarity” to enable you to understand the conclusion reached and make representations should you disagree.

Challenging a non-specific SDS

End-clients cannot make ‘blanket’ determinations. It is acceptable for clients to make a IR35 status determination for a group of workers if those workers are all engaged under the same contractual terms and working practices.

However, generalisations we saw in the initial determinations in early 2021 offered broad brush statements would be unacceptable today.

So we heard of roles being ‘generally subject to control’ without defining how; or that mutuality of obligations existed because the two parties were contracted; or in reference to in-business factors that contractors may not have purchased business insurances or may not have provided tools and equipment.

But in 2023, explanations need to be specific to the role and your circumstances. Comments like those above would not meet the bare minimum and would make for an obvious challenge.

Challenging an incorrect SDS

This requires a detailed understanding of the contractual terms and working practices.

We recommend an independent review to consider both elements and the reasoning behind the determination. The report from a reviewer should provide you an opinion on the engagement and the detail you will need to challenge the decision – assuming the reviewer also believes that the SDS is incorrect.

The client-led disagreement process

Clients must have a process for dealing with SDS challenges, with minimum requirements set out in HMRC’s ESM10015 to:

• consider the representations, which can be verbal or written;
• respond within 45 calendar days from the day representations are received; and
• state that the representations were considered and confirm with reasons that the SDS issued was correct; or
• decide the conclusion was wrong, issue a new SDS with the date this new SDS became applicable and state that the previous SDS is withdrawn
• take “reasonable care” in making any new SDS and give the reasons for its conclusion.

When can you make the challenge?

In reality, you may not know the exact working practices until you have been on-site for a while, so how can you challenge the SDS immediately?

The good news is that you can make a challenge at any time, and there is no cap on how often – until the final ‘chain’ payment (i.e., the last payment you receive) is made in relation to that engagement.

Practical considerations

If your client is not the flexible, listening kind, then once they have responded by confirming their position, be aware there is no recourse to a higher body. Indeed, multiple challenges might result in early termination of your engagement.

However, you could make a subsequent amendment to your Self-Assessment Tax Return, arguing that you have overpaid tax because your engagement was incorrectly treated as inside IR35.

But expect this amendment to result in an HMRC enquiry and if they successfully argue that your end-client was indeed correct, you might also be charged a penalty for claiming tax relief to which you weren’t entitled.

In conclusion…

Most SDS challenges occurred at the point the new rules came into force – contractors who had treated their engagements as being ‘outside’, then finding clients took a different view.

Now, engagements tend to be advertised as ‘outside IR35’ or ‘inside IR35’, so it is improbable that a contractor only willing to undertake outside engagements would apply for one which was inside – and then challenge it.

Yes -- in the interests of transparency and fairness, the legislation has laid down a right since April 6th 2021 to challenge an SDS and a process for doing so. But unfortunately no -- here in 2023 it still feels like lip service and lacks teeth.