Revisiting IR35 when it goes wrong: Status Determination Statements

HMRC are now opening investigations with businesses to review their IR35 processes which includes Status Determination Statements. But where do businesses typically get it wrong when it comes to misunderstanding IR35?

Understanding Status Determination Statements

Getting IR35 compliance right is non-negotiable for businesses engaging contractors, and the Status Determination Statement (SDS) sits at the heart of this process. The SDS is the formal document that outlines a business’s IR35 decision for each contractor, and errors here can have serious legal and financial consequences.

Key areas to get right

Below, we break down the key areas of the SDS where businesses most often go wrong, and how to avoid these pitfalls. But first, let’s recap on the guidance around Status Determination Statements:

• An individual SDS is needed for each contractor, for every assignment they undertake
• Their working practices must be taken into consideration
• Where there is a material change in their engagement, a new SDS must be created
• The end client is responsible for making the SDS
• A client-led disagreement process must be in place should contractors or any parties in the chain contest the SDS

Assigning Responsibility to the Wrong Person

The SDS must reflect the true working practices between the contractor and the business, so it’s crucial the person making the determination is well informed.

Common Mistakes:

• Delegating the SDS to HR or procurement teams who lack detailed knowledge of the engagement

Delegating the Status Determination Statement (SDS) to HR or procurement teams who lack detailed knowledge of the engagement is risky because they may not fully understand the contractor’s working practices or the specifics of the contract. This can lead to inaccurate IR35 assessments, which may not meet HMRC’s requirement for reasonable care. If the SDS is flawed, the business could become liable for unpaid tax and National Insurance.

• Failing to involve line managers or direct supervisors who understand the contractor’s role and working environment

Involving line managers or direct supervisors in IR35 status determinations is crucial because they have the clearest understanding of the contractor’s day-to-day role and working environment. Without their input, key details about control, supervision, and working practices may be missed, leading to inaccurate assessments. This increases the risk of non-compliance and a hefty increase in disagreements to manage.

Best Practice:

Ensure the person responsible for the SDS is familiar with the contractor’s work, ideally a line manager or project lead, and seek additional information from other parties if needed. This helps guarantee that the information provided is accurate and defensible if HMRC reviews the determination.

Take time to review your current IR35 approach to ensure you have the right people in place who are best positioned to make accurate determinations. If needed, call on the advice of an independent IR35 specialist to assess your existing processes and identify risks of non-compliance.

Misunderstanding or misinterpreting assessment questions

Whilst companies are not mandated to use HMRC’s CEST (Check Employment Status for Tax) tool to make Status Determination Statements, if used correctly and ethically then they will stand by determinations it produces. The tool requires users provide clear, well-informed answers to questions about control, substitution, mutuality of obligation, and other key IR35 factors. Misunderstanding these questions can lead to incorrect status decisions.

Common Mistakes:

• Guessing at answers to complex compliance questions

If the person making the determination is not clear on how to respond to certain questions, they should pause the assessment and seek further clarity before proceeding. This demonstrates why it’s important that personnel such as line managers are consulted throughout the SDS process, to ensure individual working conditions are taken into account.

• Assuming knowledge instead of seeking clarification, especially when legal or technical language is used

HMRC provide comprehensive guidance on what constitutes key areas of IR35, such as substitution, direction, and mutuality of obligation, so it’s important that the person making determinations understands these and can apply them to individual circumstances.

• Providing incomplete or vague responses that don’t align with actual working practices

If an SDS is created without fully understanding the working practices, there is a high likelihood that the contractor or another party in the engagement chain will dispute its accuracy – creating additional administration when further investigation is needed.

Best Practice:

If any aspect of the SDS is unclear, seek guidance from internal experts or external advisors. Encourage a culture where staff feel comfortable asking questions rather than making assumptions. This not only improves the accuracy of the SDS but also strengthens your compliance position.

Consider whether additional staff training is needed, and the benefits of working with an independent consultant to ensure your stakeholders remain up-to-date with changes in legislation.

Inaccurate or incomplete description of working practices

The SDS should accurately reflect how the contractor actually works, not just what is stated in the contract. HMRC will look at real working practices during an investigation.

Common Mistakes:

• Overlooking differences between what’s on paper and what happens day-to-day

To create accurate Status Determination Statements, the contractual terms that are written on paper need to reflect what happens in real life. If they vary, this puts the accuracy of determinations at risk. That’s why regular review of working practices is important, to update contractual terms where needed and ensure that there isn’t a disconnect between what’s documented in the contract and how they are expected to operate in their role.

• Failing to update the SDS when working practices or responsibilities change during the contract period

If there are material changes to how the contractor is engaged, then the SDS needs to be fully reviewed, and a new one issued if needed. This includes changes to working practices and key responsibilities. For example, if a supervisor leaves towards the end of a project and it’s deemed that the engineer can complete the outstanding work without hiring a replacement, does the business expect the engineer to fulfil any new managerial responsibilities?

• Making blanket determinations or role-based assessments based on their job discipline or title, without understanding the day-to-day working practices

HMRC advises against role-based status determination statements because they don’t take into account the individual circumstances of each contractor. This blanket approach fails to meet their legal requirement of taking reasonable care under IR35, which could make the status determination invalid. Instead, each contractor’s working practices and contract terms must be assessed individually to ensure compliance.

Best Practice:

Regularly review and update the SDS to ensure it matches the current working relationship. Collect feedback from those working directly with the contractor to capture the true nature of the engagement and schedule reviews when there is a change in management.

This is an area that businesses can fall foul of, so it’s worth considering whether you would benefit from engaging an external company to undertake an independent review of your active determinations.

Neglecting ongoing review and reassessment

Where contractors are engaged on long-term contracts, working practices can change over time, and the SDS must be updated accordingly. A one-off assessment isn’t enough to ensure compliance with the off-payroll working rules.

Common Mistakes:

• Treating the SDS as a one-time exercise

Anytime there is a material change, the SDS needs to be fully reviewed to ensure it still accurately reflects the working practices. It’s not a process that can be completed once and then filed and forgotten about, it needs to remain a live document throughout the contractor’s assignment.

• Not reviewing determinations when a contractor’s role, location, or reporting lines change

A new manager may have a different way of working, or may not be as familiar with IR35 to know when they are making significant changes that should prompt a review of the contractor’s SDS. Similarly, changes in location and responsibilities should trigger an SDS review.

• Not issuing a new SDS when the contractor starts a new assignment

Under IR35 guidelines, there is no issue with rehiring a contractor to complete a second assignment for you. provided there is no mutuality of obligation – an expectation on either side that further work will be completed. If you do decide to engage the support of a contractor on additional assignments, then you will need to complete a new SDS. Whilst their working practices may not have changed, you still need to evidence that you have undertaken an appropriate assessment and issued an accurate determination.

• Overlooking the need for periodic reassessment

Regardless of whether material changes have been brought to your attention, to remain compliant it’s important to review Status Determination Statements periodically to ensure they are still accurate.

• Mismanaging status disagreements

Contractors and parties within the engagement chain, such as the recruitment agency retaining the contractor, have the right to dispute an SDS if they feel it is not accurate. HMRC states that a client-led disagreement process must be in place, and businesses must respond within 45 days. All evidence provided must be reviewed alongside HMRC’s employment status indicators, and the original SDS must remain in place whilst the dispute is being evaluated.

Best Practice:

Implement a schedule for regular review of all SDS determinations. Reassess status whenever there are changes to contracts, working practices, or project scope.

To ensure determinations are made correctly when making reassessments, we’d recommend ensuring that your stakeholders have up-to-date knowledge on any changes to the off-payroll working rules that HMRC periodically publish. Working with an external IR35 specialist can help your business stay informed.