What Can You Learn From Your SDS?
Understand The Qualities of a Good SDS
When the IR35 (off-payroll) reforms in the private sector come into force in April 2021, Status Determination Statements (SDS) are just one of the issues that employment agencies and contractors must understand.
As a contractor, if you can recognise the qualities of a good SDS and understand the assessment procedure, you can have informed conversations with your end hirers to ensure your IR35 status is correct and maximise your opportunities to work ‘outside’ IR35 compliantly.
What is an SDS?
An SDS is an official document, issued to contractors and payroll workers by their end hirer (except those that are ‘small’), outlining the contractor’s deemed employment status.
In the private sector, while it is currently the contractor’s responsibility to determine their own IR35 status (whether they are working ‘inside’ or ‘outside’), come April 2021, this obligation will shift to (non-small) end hirers.
To reach an accurate and compliant assessment of IR35 status, the contracts in the supply chain must be examined alongside the actual working practices. Once the assessment is complete, the SDS confirming the position is issued.
There are three points at which assessments should be undertaken:
- In-role (contractor) assessment – this takes place when the contractor is already working in the role. There will be a large number of these when the rules become effective, in April 2020.
- Role assessment – this determines the likely (‘indicative’) status of a role before a contractor is appointed.
- Role re-assessment – this is the re-assessment of an assessed role. It ensures that the working practices reflect the assigned status. This assessment also takes place if a contract is extended to ensure continued compliance.
What should a good assessment look at?
All SDSs must state whether the worker would be deemed as an employee or officeholder for tax and NIC purposes.
Alongside providing you with an ‘inside’ or ‘outside’ IR35 status, a good SDS will also outline the reasons for that decision as proof that the end hirer has taken ‘reasonable care’ in arriving at that conclusion. This level of detail is an advantage for contractors because if you receive an ‘inside’ status, your SDS will explain why, meaning you know where to amend your contract and working practices if that’s possible, to continue operating ‘outside’ IR35 compliantly.
The key areas that your SDS should look at are:
- Mutuality of Obligation – are you (the contractor) and the end hirer obligated to one another on an ongoing basis? Are you obligated to accept work from the hirer? Is your hirer obligated to pay you even if you haven’t worked on a given day? These are all aspects which would push an assessment towards an ‘inside’ IR35 decision.
- Right to Substitute – could you offer a suitably qualified and experienced substitute for your role? If you’re able to make a substitution through your PSC, where you’re in control and your limited company processes the substitute’s payment, this would indicate you’re more likely to be ‘outside’ IR35. Crucially, this is different from an agency making a substitution.
- Control – who controls how, when, and where you deliver your work? Unless there is an operational reason for a specific location or timing, to sit towards the ‘outside’ end of the IR35 spectrum, contractors should have control over where, when, and how they deliver their output.
- Financial Risk – could you suffer financial loss? Do you need insurance? If you could suffer financially for failing to complete the job on time or to the end user’s satisfaction, this would be more indicative of an ‘outside’ IR35 status.
- Behaving Like an Employee – are you on the holiday rota? Do you use a lot of end-user equipment? Do you receive anything approaching sick pay? If these kinds of behaviours are present, you’re more likely to be considered ‘inside’ IR35.
Your SDS should examine all of these areas as a whole, not just one or two in isolation. This is the same way that a Court or Tribunal would reach a decision on your IR35 employment status.
Why is your SDS important?
Although end hirers are responsible for issuing and passing on your SDS correctly, it’s in your best interest to check with your end-user that they are using a reliable and detailed SDS for two reasons:
- Increased opportunities for ‘outside’ assignments. If you receive an ‘inside’ result, understanding the reasons behind it enables you to speak to end hirers and the supply chain to identify where you can amend your contract so you can work ‘outside’ compliantly. Note: Once elements of your contract and working practices are changed, your end hirer should issue a second SDS to ensure your new terms are compliant.
- Reduced risk of Liability. If you do receive an ‘outside’ result, using a good SDS proves your end hirer has taken ‘reasonable care’ when determining your status. Therefore, if HMRC challenges your ‘outside’ status, you, your employment agency, and your end hirer are unlikely to be liable for any unpaid tax or financial penalties.
If you receive an SDS from your end hirer that you are unhappy with, or believe is unreliable, you can challenge the result. You must do so in writing and must include the rationale behind your decision.
However, if you communicate with your end hirers and employment agency now, you may be able to influence their decision to use a reliable and detailed assessment, such as JSA’s IR35 in-house assessment tool. This will allow you to be confident in your status and continue working through your PSC as much as possible.
To find out more about SDSs and how IR35 will affect you, visit our IR35 Hub.