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.

The post Revisiting IR35 when it goes wrong: Status Determination Statements appeared first on Linx.

A number of different people across a range of departments will likely be involved in ensuring IR35 compliance, but their training needs will widely differ, depending on their role – whether that’s making the status determinations, or passing the decision down the recruitment supply chain. 

Why IR35 training is vital 

At its core, IR35 aims to identify disguised employees, those working as external contractors but operating in the same way as an employee. The distinction is vital, as it affects how these individuals are taxed and how companies account for them. Failure to comply with IR35 can lead to severe financial penalties and reputational damage, making it a significant risk area for businesses. 

IR35 training needs to both educate participants at the level of detail and knowledge they need to perform their individual roles, as well as clearly define internal processes they are expected to follow. This variability is precisely why bespoke IR35 training is crucial. A tailored training programme can address the unique ways in which IR35 affects a business, taking into consideration its specific hiring practices and contractor engagements. 

The importance of tailored IR35 training becomes even more pronounced when we consider the varied roles within an organisation and their respective responsibilities towards IR35 compliance. 

IR35 training for Hiring Managers  

Often at the frontline of engaging contractors, they need training that equips them with the skills to identify when a role might fall inside IR35 and understand the implications of these decisions. Being able to accurately assess contract roles from the outset and use assessment tools such as HMRC’s Check Employment Status for Tax (CEST), can significantly mitigate the risk of non-compliance. 

IR35 training for Directors and senior management 

These stakeholders play a pivotal role in setting the tone and governance around IR35 compliance. Training for this group needs to underscore the financial and reputational risks associated with IR35, share relevant case law, and ensure they have the knowledge to oversee compliant practices. As well as looking at how the business can embed a culture of compliance within the organisation. 

IR35 training for HR and Talent Acquisition teams 

These departments often form the backbone of implementing IR35 compliant hiring practices. Their training should focus on the procedural aspects, including the checks and balances needed to ensure IR35 has been managed accurately ahead of onboarding. They’ll also need a clear understanding of the status disagreement process and how IR35 compliance is documented, should HMRC look for evidence that reasonable care has been taken to adhere to the legislation. 

Getting IR35 training right 

Given the complexities and evolving nature of IR35 legislation, engaging with an external IR35 specialist partner offers numerous benefits. These experts provide a depth of knowledge and experience that can be invaluable in navigating the intricacies of compliance. They can offer bespoke training, tailored specifically to the needs of your organisation and stakeholders, and ensure that your teams are up to date with the latest legislative developments. Moreover, specialist partners can provide ongoing support, helping to review contracts and working practices, thereby ensuring that your business remains compliant over time. 

Our Linx IR35 experts work with companies to identify their training needs, before creating programmes that are driven by your internal processes, combined with their in-depth knowledge of the off-payroll working legislation. They also carefully consider how that training should be delivered to best engage each audience, from online training resources to face-to-face workshops, blending the right learning techniques to ensure comprehensive training and mitigate the risk of non-compliance. 

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Understanding IR35 in the engineering sector 

For those not up to speed, IR35 is HMRC’s off-payroll working legislation that was initially rolled out to the public sector, before being extended to the private sector in recent years. 

Put simply, it was devised to tackle tax avoidance practices, providing clear differentiation on what constitutes off-payroll working through a Personal Service Company (PSC), and what indicates deemed employment. Deemed employment is HMRC’s term for a contingent worker operating through a PSC who’s working practices are too similar to directly-hired personnel, deeming them employed for the purpose of tax and National Insurance deductions. Those contingent workers who fall out of scope of IR35, are responsible for managing their own tax implications through their PSC. 

What does this mean for engineering companies? 

When IR35 was first extended to the private sector there was lots of talk of reducing the talent pool, because it would deter candidates from opting to work as external contractors.  

There are several key things to remember however: 

• IR35 only applies to contingent workers engaged through Personal Service Companies, Pay As You Earn and Umbrella contractors are not required to adhere to IR35 

• IR35 assessments, known as Status Determination Statements, need to be completed for each assignment, to determine if the off-payroll working rules apply – not all assignment may be in scope 

• Where Status Determination Statements indicate the assignment is in scope, the contingent worker can still operate through their PSC by opting for deemed payments to manage their tax and National Insurance implications 

• The working practices and remit the contingent worker will have to complete the work, will play a significant factor in their IR35 status determination 

What’s clear to see since the private sector implementation is that where niche and specialist skills are required that engineering companies do not have in-house, the engagement of PSC contingent workers is still paramount to project delivery. However, their working practices need to evidence that they are working externally to the client they are delivering the work to, and they must be given the responsibility and remit to complete the work without unnecessary direction, supervision or control. Without a detailed understanding of how IR35 is assessed, engineering companies risk losing access to the crucial specialist skills they need. 

Managing the risks of IR35 non-compliance 

Done correctly, engineering companies shouldn’t see IR35 as an administrative burden, provided they have the right support in place to help them manage compliance. 

Internal audits can help to identify any high-risk areas, as well as undertaking a review of contractual arrangements with agencies to ensure processes remain in line with your company’s IR35 strategy. Evaluation of existing IR35 training for staff can also help to identify any areas of concern that need to be addressed, whilst checking training follows the latest IR35 insight from HMRC. 

Our experts have extensive knowledge of IR35 in the engineering sector, teamed with insight on how best to manage the off-payroll working rules in large organisations with multiple recruitment suppliers. They operate as the single point of contact to manage IR35 compliance, reviewing internal processes to ensure they will stand up to scrutiny, whilst ensuring adequate training is given to key stakeholders involved in status determinations. How adept the recruitment supply chain is when managing in and out of scope decisions also plays a crucial role in IR35 compliance, which is why our team extends their support to suppliers as well as internal stakeholders. 

Retaining access to specialist skills 

A company’s approach to IR35 needs to carefully balance the need to adhere to HMRC’s off-payroll working rules and mitigate risk, whilst ensuring access to the skills needed to win and deliver engineering projects. 

When HMRC first announced that IR35 would be extended to the private sector, some businesses took a blanket decision to stop using Personal Services Companies. It was a stance that removed the risk of non-compliance but also drastically reduced their access to skills and specialist talent.  

Our Linx team works with companies to understand their contracting requirements, to ensure the best engagement solution is put in place to secure the right talent needed. This includes the use of Statement of Work models to secure skills on a project deliverables basis, with a clear contract in place to indicate milestones and payments. 

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Here are the seven main ways you can reduce the IR35 administration load, and how Linx can support you every step of the way. 

Implement a centralised IR35 process 

One of the biggest challenges businesses face is inconsistency. When different departments or hiring managers approach IR35 status determination assessments in different ways, mistakes are inevitable, whilst also increasing the likelihood of disagreement challenges. A centralised IR35 process ensures everyone follows the same procedure – using standard tools, templates, and documentation methods. 

How Linx helps: We can design, implement and operate your central IR35 process, ensuring robust governance and a consistent compliance approach across your organisation. For companies with multiple divisions or business units, the need to have a central process is even more crucial. 

Appoint IR35 governance 

IR35 compliance is not something that can be tackled ad hoc, it requires dedicated oversight. Appointing an IR35 lead or small governance team ensures the business has clear accountability for policy, process management, and issue resolution. Those colleagues making Status Determination Statement assessments will also have a clear point of escalation if they need further support. 

How Linx helps: If you don’t have the resource in-house, Linx can act as your outsourced IR35 governance partner – managing compliance on your behalf, monitoring updates, and ensuring best practice is upheld. 

Train hiring managers and internal teams 

Many of the risks around IR35 arise from misunderstandings or lack of awareness — especially among hiring managers. Without proper training, they may inadvertently create contracts or working conditions that contradict a status determination. Where their knowledge of IR35 is not up to speed, companies also carry the risk that in and out of scope IR35 determinations may not be accurate. 

How Linx helps: We deliver tailored IR35 training for hiring teams, procurement, HR, and talent acquisition stakeholders – helping them understand their responsibilities and reduce risk through everyday actions. 

Regularly review and refresh determinations 

IR35 isn’t a one-off box-ticking exercise. Contractors’ roles, responsibilities, and working practices often change over time. If determinations aren’t periodically reviewed and updated, businesses risk non-compliance – even with well-intentioned processes in place. 

How Linx helps: We maintain regular touchpoints to review and refresh status determinations, keeping your compliance up to date and removing the burden of constant monitoring from your internal teams. 

Maintain well-documented audit trails 

HMRC expects businesses to provide clear, accurate records of their IR35 assessments and decisions to demonstrate they have taken reasonable care. That means securely storing contracts, status determinations, communication trails, and the rationale behind each decision. Add in a recruitment supply chain who engage the PSC contingent workers on your behalf, and the task becomes even more complex. 

How Linx helps: Linx work with organisations to devise supply chain compliance audits, to ensure status determinations have been accurately passed down and all the necessary paperwork is in place to satisfy HMRC’s reporting requirements – making it easy to evidence compliance if challenged. 

Stay informed on legal and HMRC updates 

IR35 is a moving target. With legal cases setting new precedents and HMRC periodically adjusting guidance, it’s crucial that businesses stay updated. But monitoring policy changes and adapting processes accordingly adds another layer of administration. 

How Linx helps: We stay on top of every IR35 development, so you don’t have to. Our team ensures your approach is always aligned with the latest legal and regulatory expectations and we maintain regular communication with our clients to notify them of any changes. 

Engage an IR35 expert 

The simplest way to reduce the administrative burden of IR35? Hand it over to the experts. Managing compliance internally requires time, legal understanding, and resourcing that many businesses simply don’t have. It also requires colleagues to become IR35 experts, whilst continuing to perform their other responsibilities. 

How Linx helps: We work with organisations across the UK to support them with IR35. From managing assessments, to auditing their supply chain and identifying non-compliance risks in internal processes, we’re able to share the latest IR35 insight to help your business manage IR35. Our team are committed to ensuring your organisation has the right information to make informed decisions on IR35.  

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In our latest blog we take a more detailed look into status determinations. 

What is an IR35 determination? 

In short, it’s the process organisations are required to go through to determine the tax status of workers who are engaged through a Personal Service Company (PSC). 

HMRC first introduced the need to perform IR35 determination checks on off-payroll workers in the public sector, before extending the legislation to the private sector. Its purpose many agree was to manage tax avoidance practices and make clear differentiations between those workers who are operating independently as an external PSC worker. As opposed to those who are operating too similarly to directly engaged permanent workers. The biggest difference between them is how HMRC collect tax on their earnings. 

What is a determination status? 

The determination status, derived through a Status Determination Statement (SDS), is the document that details each worker’s employment status for their assignment. An SDS should detail one of two outcomes: in scope of IR35 or out of scope. 

In scope means that IR35 does apply to the worker’s assignment, so tax and National Insurance Contributions need to be deducted from their earnings, known as Deemed Payment. Out of scope on the other hand indicates that the worker is operating outside of the off-payroll working legislation, so IR35 does not apply, and they are responsible for meeting their tax implications through their Personal Service Company. 

Who is responsible for IR35 determinations? 

The End Client is responsible for making the IR35 determination, by issuing an SDS to all parties involved in the contingent worker’s engagement. 

For organisations who partner with recruitment agencies to supply contingent workers, it’s critical that IR35 determinations are still made by the End Client, the company which the worker is delivering the work to. Whilst agencies might be able to help share insight into working practices, businesses need transparent processes in place to demonstrate that reasonable care has been taking to ensure the accuracy of status determinations, which may need to be evidenced should HMRC wish to open an investigation. 

The End Client should have a formal disagreement process in place, should the worker or any stakeholders in their engagement chain wish to challenge the determination. Companies have 45 days to respond to the dispute, detailing their reasoning behind the outcome. The original status must remain in place during the investigation period, and if the review determines a different outcome and new SDS must be created and shared with all parties. 

Is there an IR35 determination calculator? 

HMRC developed a digital tool, Check Employment Status For Tax (CEST), which is free for organisations to use to make status determinations. Users answer a series of questions around how the worker is engaged, before the tool outputs it’s determination: in scope, out of scope or unable to determine. Where the tool is unable to determine a clear IR35 status, further review of working practices will be required to identify areas that may be unclear. 

Other tools are available in the market and HMRC do not mandate the use of CEST, however they say they will stand by its outcomes provided the tool has been used correctly and honestly. 

What are the three key tests for IR35? 

Tools like CEST assess a range of areas to determine whether HMRC believe IR35 applies to the worker, including three key areas. 

Substitution 

The concept refers to the structure and nature of a working relationship between an off-payroll worker and their End Client. The right to substitution is one of the key tests in determining an IR35 status. It refers to whether a PSC worker has the genuine right to send someone else to do their work in their place. If the worker is free to provide a substitute with similar skills and technical knowledge, and the client would accept this without restriction, it indicates a level of independence typical of self-employment. Alternatively, if the client requires the contractor to personally carry out the work, this may point towards an employment relationship – potentially bringing the engagement inside IR35. Right to substitution helps determine whether the worker is genuinely self-employed or effectively operating as an employee in disguise, a practice known as Disguised Employment. 

Control 

Control is a fundamental test in determining whether the PSC worker falls inside or outside IR35. It looks at how much direction the client has over what work is done, how it’s done, and when or where it’s carried out. If the client exercises a high level of control and supervision, like they would an employee, it suggests the worker is not truly independent. Genuine PSC workers typically have autonomy over their work, which can help support an outside IR35 status. Therefore, assessing control is crucial in identifying the true nature of the working relationship. 

Mutuality of obligation 

Mutuality of obligation (often referred to as MOO) is another key factor in determining the IR35 status of an off-payroll worker. It refers to whether the client is obliged to offer work and whether the worker is obliged to accept it. In a typical employment relationship, there is an ongoing expectation of work and payment. However, a genuine contractor relationship should lack this mutual obligation – work is agreed on a project-by-project basis, with no guarantee of future engagement from both parties. Crucially as well, the worker should not feel they are obligated to accept additional work the client requests. The presence or absence of MOO helps distinguish between employment and self-employment, making it a crucial part of any IR35 assessment. 

What are the red flags for iR35? 

Fundamentally, HMRC’s legislation is designed to identify those workers who are acting in the same way as an employee of the business but work through their own PSC and as such do not pay tax and National Insurance Contributions in the same way as Pay As You Earn employees do. 

As a business it’s crucial that the engagement terms of your off-payroll workers, and their working practices have clear differentiation between how employees and PSC workers are engaged. 

Income reliance from one client 

Red flags can include workers who obtain a large percentage of their income from one client, potentially indicating that there is an agreement, whether that be formal or informal, that they will be secured to work back-to-back on projects. Whilst this might be due to the specialist services the worker provides and not because there is mutuality of obligation, none the less it’s important to have clear processes in place for repeat assignments, and an individual SDS for each. 

Part and parcel 

Part and parcel is a key measure for HMRC’s determination of IR35 status, where it looks for evidence that the PSC worker has become integrated into the business. Factor such as whether they have their own desk, security pass and access to subsidised canteen facilities need to be considered. Together with indicators such as the worker using a company email address or being asked to manage directly engaged permanent staff. Access levels to areas of the building or computer databases also needs to be considered, would a company grant permission for external parties to access confidential information without supervision? 

Financial Risk 

How much risk financially the worker takes on may be a red flag, in particular where they carry very little risk. If they are providing their skills to the company through their PSC company, this should indicate a contract of service not employment. As such it’s expected that the PSC company will carry some financial risk, such as being paid a fixed price for the work they deliver – regardless of how long it takes them. If it takes them longer to complete the work, this would not automatically allow them to bill the client more. Similarly, in stances where the work standard is not adequate, the PSC company would typically be expected to rectify this at their own cost, indicating the financial risk they have taken on. 

How long does an IR35 status determination last? 

The expiry length of an IR35 status determination can be a grey area. Whilst it is intended for the length of the engagement, longer assignments may require additional scrutiny. 

The SDS provides a snapshot of what the engagement looks like ahead of the assignment starting. Once the contingent worker commences, working practices may defer to those expected, even where the assessment has been made in good faith. Another factor that may indicate that further review is needed, is when the remit of the worker changes in line with the needs of the project. That’s not unusual, but it will require a new SDS to be created where there are material changes to how the worker is engaged. 

It’s also best practice to reissue Status Determination Statements when assignments have been active for 12 months or more. Undertaking reassessments ensure that key measures such as part and parcel haven’t become difficult to clearly evaluate over time. Where the new SDS indicates a change in their determination, this needs to be passed to the worker and down the chain of engagement. 

For organisations who engage hundreds of off-payroll workers this need to reevaluate status determinations can be highly administrative and time-consuming. That’s why Linx’s IR35 team works with clients to manage this process on their behalf, ensuring the correct checks and measures are in place to provide them with meaningful insight to make informed changes and future decisions around IR35. 

How can businesses ensure their status determinations are robust? 

We’d always recommend partnering with an external consultancy to provide independent and impartial oversight into your IR35 processes, including how you perform status determinations. 

This includes reviewing the staff training your business provides, to ensure those involved in making status determinations have the right level of knowledge about IR35. How IR35 is managed within your recruitment supply chain is also a key area of concern for our experienced team, who’ll work with you to develop tailored supply chain audits if needed to actively manage the risk of non-compliance. 

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Understanding the changes to CEST

Once the changes to CEST had been released, the industry opinion was that any updates were only cosmetic, with no fundamental change to the technical principles and underlying logic that determines the in or out of scope outcome.

One of the most recognisable updates is that the language has been simplified, designed to improve user experience and make answering the questions much easier.

The questions the CEST digital tool asks were originally designed to help End Clients determine the tax status of their off-payroll workers, and that’s certainly not changed with these minor updates.

CEST and Mutuality of Obligation

The biggest noticeable change to the questions, is around mutuality of obligation, posing the question ‘Do you have, or will there be, a contract in place?’. It’s an important addition however, as HMRC’s digital tool will not let you continue if you enter a no response. This, they say, is because there must be a contract in place between two parties in order to consider whether it is a self-employed or employed engagement. They detail that their definition of whether a contract is in existence is through one of two measures:

• The company engaging the workers has an obligation to pay then a wage or similar renumeration
• The worker is obliged to undertake their own work or skills.

HMRC guidance published on this topic, in their Employment Status Manual ESM11036, states that answering yes to the question will not impact the IR35 status determination.

The importance of CEST

HMRC has not mandated the compulsory use of CEST to make status determinations on the workers, however it has made it clear that it recommends its use. In the newly updated disclaimer at the start of the digital tool, it reconfirms that HMRC will stand by in and out of scope determinations the tool outputs, provided it has been used honestly.

Below we look at instances where HMRC will not uphold CEST outcomes:

• Actions that are deliberately intended to provide a certain result, what they call ‘contrived arrangements’
• Falsely answering questions about engagement terms, intentionally knowing they have been answered in a way that is not correct

When investigated, these would be used as evidence of deliberately attempting to misuse the tool, indicating non-compliance – something they say can attract higher penalties.

Using CEST to manage IR35 compliance

When we’re working with clients, we strongly recommend integrating HMRC’s CEST tool into status determination processes. Using CEST not only demonstrates that your business is taking reasonable care in assessing employment status, but it also provides a clear, auditable record of each determination.

Being able to evidence IR35 compliance through steps such as using HMRC’s digital tool is crucial for protecting your business and proactively managing risk.

There are several benefits to using the CEST tool:

• Shows that your IR35 decisions are based on HMRC’s own guidance, strengthening your compliance position.
• You can save and document each assessment, providing evidence of due diligence and responsible practice.
• You can leverage HMRC’s commitment to stand by CEST results, provided the tool is used honestly and accurately.

Making CEST a core part of your IR35 compliance strategy helps minimise risk and safeguard your business from potential penalties.

Managing the administrative burden that comes with IR35

From understanding the engagement terms of individual workers, to reviewing service agreements and the standard processes workers follow such as their working practices, IR35 can be difficult to manage. Add to that the additional complexity of managing your recruitment supply chain to ensure processes are being followed and deemed payments are in place for in scope workers, and it creates a heavy administrative burden for HR and talent acquisition teams.

To remain compliant with IR35 off-payroll working legislation however, regular check and measures need to be in place to ensure your current IR35 strategy is still correct. Key areas such as staff training also need to be reviewed to ensure those people making Status Determination Statements have adequate knowledge to accurately do so. Whilst periodical supply chain audits can help to identify areas of concern that need further development to protect your business from potential IR35 non-compliance.

These are all services our experienced IR35 team provide to our clients, and we’re always happy to chat to your business to discuss how we can support you.

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When the IR35 off-payroll working legislation was extended to the Private Sector in 2021 businesses implemented new processes and procedures to meet IR35 requirements. A few years on, do these same practices still hold up? Are they effective for risk management? Would they stand up to robust scrutiny if required? 

In this comprehensive guide we’ll recap on what IR35 is, the implications for your business and the ongoing steps you should be taking to manage IR35 compliance. This includes: 

• Understanding the implications of IR35 for your business 

• Understanding your IR35 responsibilities as an End Client 

• Assessing and managing the risks associated with IR35 

• Developing an IR35 strategy that’s right for your business 

• Taking control of IR35 compliance across your supply chain 

• Benefits of working with an external consultancy for IR35 compliance 

Understanding the implications of IR35 for your business 

What is IR35? 

IR35, known as the off-payroll working rules, was introduced by HMRC to ensure that contingent workers pay the correct amount of tax and National Insurance. It affects individuals providing their services through Personal Service Companies (PSCs), which you may also see referred to as Limited Company contingent workers. The legislation aims to distinguish between genuine external contingent workers and ‘disguised employees’ — off-payroll workers who operate in a similar way to permanent workers but are engaged through their own business. 

To determine whether IR35 applies to a contingent worker, HMRC requires the end client, whom the worker is delivering their services to, completes a Status Determination Statement (SDS) – which declares whether they are in or out of scope for IR35. Put simply, in scope suggests their working practices are too like permanent members of staff, so IR35 applies, and tax and national insurance must be paid, known as a Deemed Payment. Out of scope determinations on the other hand have found that the working practices suggest the contingent worker is operating independently, so IR35 does not apply, and the worker is responsible for managing their own tax implications as a business owner. IR35 needs to be assessed for each assignment a contingent worker operating through a PSC undertakes, and where working practices change significantly and their responsibilities alter, a new SDS needs to be issued.  

To create Status Determination Statements HMRC recommends using their Check Employment Status for Tax (CEST) online tool, which had an update in April 2025. Other tools have been developed by companies offering IR35 support, and it’s important for businesses to make an informed decision about which they believe will provide the most accurate Status Determination Statements. It’s worth noting though, HMRC say they will stand by their CEST tool’s outcomes for tax purposes provided accurate information has been entered and it has been used in line with their guidance. 

Why IR35 compliance matters 

Taking a lenient approach to IR35 can lead to significant financial penalties, legal complications, and reputational damage. IR35 compliance shouldn’t be just about generating Status Determination Statements; it’s an ongoing effort that requires strategic direction and operational diligence. Adequate monitoring and robust compliance processes will reduce the potential risks of non-compliance, which can include back taxes, interest and fines. 

Reasonable care is also a significant measure for HMRC should they open an investigation into how IR35 is being managed within your business. They’ll want to see that steps have been taken to demonstrate that colleagues in your organisation have had training on IR35, processes you have in place in your HR and talent acquisition teams are effective in identifying in and out of scope assignments, and any recruitment suppliers you work with are implementing Status Determination Statements correctly. 

Understanding your IR35 responsibilities as an End Client 

The Basics of IR35 

IR35 is a piece of legislation designed to combat tax avoidance by contingent workers operating through Personal Service Companies (PSC). Where historically it was the PSC worker’s responsibility to determine their tax status for assignments they completed, IR35 has taken this responsibility away from the workers and moved it to the End Client, the company who the work is being delivered to.  This means that organisations now need a good understanding of working practices, how the relationship will work and who is responsible for what. For example, will the PSC worker be providing their own equipment, or will they be using the client’s tools? When it comes to annual leave, will the contingent worker be required to request permission from the client to take time off? 

Where contingent workers operate out of scope of IR35, they are deemed to be delivering a service to the End Client, how they deliver that service is for them to decide. This includes providing adequately trained substitutes to work on their behalf when they are unavailable or notifying the End Client when they will be on leave without needing permission first. Out of scope contingent workers will also typically deliver their services against pre-agreed milestones, where they are left to determine how best to complete the work, with little direction or control from the End Client.  

It’s important for organisations to understand how IR35 is assessed, to know the questions they need to be asking to make accurate Status Determination Statements. This may include looking at any changes they can make to working practices to help provide clear differentiation between in and out of scope assignments. For organisations working across various industry sectors, these processes might look very different depending on the security levels or regulatory requirements. 

Responsibilities of End Clients Under IR35 Legislation 

Once the End client has created the Status Determination Statement (SDS), they are required to pass it down the supply chain, to ensure all parties understand the outcome and can apply it to their contingent worker’s assignment. 

Should the worker, or anyone else in the chain such as the Fee Payer, wish to challenge the SDS a clear Status Disagreement Process needs to be put in place. The End Client must respond within 45 calendar days, and the existing in or out of scope determination will remain in place during the investigation period. Where the outcome of the review changes the IR35 status, a new SDS must be created and passed down to all parties in the supply chain. 

Assessing and managing the risks associated with IR35 

Identifying high-risk areas in your organisation 

Effective IR35 management begins with identifying areas within your organisation where non-compliance risks might reside. Companies that employ multiple contingent workers through various recruitment suppliers must scrutinise how their agencies are approaching IR35 as well as looking at internal processes. Does each party involved fully understand their responsibilities? How are IR35 assessments performed? What checks are in place? Are blanket decisions being taken on groups of workers operating in a similar way? Each assignment requires its own Status Determination Statement, but they can only be accurate when there is adequate training on IR35 and a solid understanding of working practices. 

Practical ways to mitigate IR35 risks 

Identifying any areas of concern can be difficult to spot when you’re in the day-to-day details, which is why we always recommend engaging an external consultancy to make an independent review of how IR35 is being managed within your business and any risks that need immediately addressing. 

Risk mitigation requires an IR35 review of current contracts and working practices with contingent workers as well as an audit of your recruitment supply chain. Documentation needs to reflect everyday processes and staff training needs to be evidenced to demonstrate reasonable care has been taken to manage IR35 within your organisation. 

Developing an IR35 Strategy that’s right for your business 

Internal processes: are they fit for purpose? 

Having robust internal processes means your business is better equipped to make accurate IR35 determinations. For IR35 compliance, it’s not just about having processes in place; it’s also about the clarity and consistency of those processes across all business units and supply chain stakeholders. 

Training and awareness for staff involved in IR35 

For HR, talent procurement teams, and hiring managers, understanding IR35 is fundamental to compliance. Linx provides IR35 compliance solutions that include comprehensive reviews of staff training, pinpointing knowledge gaps, and offering training programmes that elevate your team’s understanding and decision-making ability. 

Conducting supply chain audits 

Your recruitment supply chain is a critical element in ensuring IR35 compliance. Regular audits can identify conflicts, and highlight changes required to maintain IR35 compliance. 

Taking control of IR35 compliance across your supply chain 

For businesses who already have an IR35 strategy in place devised when the off-payroll working rules were extended to the Private Sector in 2021, it’s crucial to ensure this is still being actioned correctly and whether the approach continues to be right for your business. 

Changes within your business operations, functional departments and new personnel within your business or your supply chain, may have resulted in small changes to working practices and how existing IR35 processes are now being interpreted. That’s why we recommend undertaking periodical reviews of a company’s IR35 strategy, to ensure that what’s documented still reflects today’s operations. Changes in legislation also need to be monitored and, where appropriate, be reflected in processes and working practices, making it even more crucial to regularly review IR35 protocols. 

Benefits of working with an external consultancy for IR35 compliance 

Independent review and expert advice 

HMRC want to see that organisations have taken reasonable care to manage IR35 within their business, and that steps have been taken to understand the off-payroll working rules. Engaging an independent partner such as Linx, can allow businesses to gain wider industry knowledge and best practice, whilst securing the support of external experts who are best placed to review your IR35 strategy and identify areas of risk and non-compliance. 

Reducing the administrative burden 

Comprehensive audits of IR35 processes to assess the accuracy of Status Determination Statements and working practices can take up significant time, tying up internal resources on lengthy reviews. Extensive training is also required to ensure they can adequately assess processes and identify areas of non-conformance, which adds additional duties and responsibilities to often already busy HR and talent acquisition teams. 

Our role at Linx is to bring an independent perspective that can proactively manage IR35 compliance whilst alleviating the administrative burden. Through independent IR35 reviews and sharing of best practice, we can help your business address any compliance challenges with strategies that are proven. 

Tailored services around your business needs 

Our Linx IR35 specialists don’t just provide a one-size-fits-all solution; they offer a range of services based on the needs of our clients. Whether that’s supply chain auditing to understand how IR35 is being managed, extensive reviews of internal processes or an assessment on staff training to identify any knowledge gaps and additional learning required. 

They’ll work with you to assess the key areas they recommend tackling first, before devising a tailored plan that best fits your business’s IR35 concerns. 

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With the change last year in government, the precedence of such issues will only intensify as new legislation is introduced, and new acts are drafted for debate.

Compliance is not just about adhering to legal requirements; it forms the foundation of trust, brand reputation, and the overall integrity of an organisation. Here’s why UK businesses must make recruitment compliance a priority in 2025.

Adapting to legislation changes

Legislation is dynamic, reflecting continuous socio-economic changes. Laws concerning recruitment, such as modifications in the Equality Act, adjustments following Brexit, or evolving tax regulations like IR35, need constant attention. Businesses must be proactive in educating themselves about these changes to avoid non-compliance consequences, which can be severe in terms of legal penalties, costs, and reputational damage.

GDPR and Data Protection

The introduction of the General Data Protection Regulation (GDPR) marked a substantial shift in data privacy laws. Recruitment involves processing a lot of personal data, and mishandling this can lead to hefty fines and a trust deficit with potential employees. By ensuring GDPR compliance, businesses not only protect themselves legally but also demonstrate to candidates that they are serious about protecting personal information – a key concern for many individuals.

Right to Work and Immigration Controls

In the context of post-Brexit Britain, UK businesses must be diligently aware of Right to Work checks to ensure that their workforce is legally permitted to work in the country. With immigration policies subject to change, businesses must be agile and correctly verify the status of their employees to avoid the risk of illegal employment penalties.

For businesses hiring talent from abroad, additional compliance layers come into play, including visa applications, and adapting recruitment and onboarding practices to accommodate cultural differences. Each step requires careful consideration to ensure full legal compliance in an increasingly global talent pool.

If you’re engaging with workers who reside outside the UK or have entered the country to undertake a Statement of Works, it’s advisable to partner with an independent, external consultancy business who has the expertise to ensure your employment practices remain compliant.

The importance of delivering equity and inclusion

A diverse workforce drives innovation and reflects an inclusive company culture. However, achieving diversity targets must be balanced against the need to avoid discrimination in the recruitment process. Therefore, companies need to embed fair hiring practices into their recruitment strategies to align with both ethical standards and compliance regulations.

Managing Agency and Contract Workers

In industrial sectors such as engineering and construction, an increasing number of UK businesses rely on agency and contract workers. Compliance with the Agency Workers Regulations (AWR) and IR35 is critical. Mistakes in classification or contractual terms can lead to significant tax liabilities and undermine workers’ rights, potentially causing legal disputes and reputational harm.

Whether businesses engage contractors directly or through their supply chain, it’s crucial that auditing processes are in place to ensure this is managed compliantly.

Maintaining meticulous record-keeping

Documentation and record-keeping are crucial in evidencing compliance and facilitating audits. In case of legal scrutiny, having detailed records of your recruitment process, including any investigations undertaken, can potentially save organisations from damaging legal ramifications and fines. Understanding the steps these processes need to take however as recruitment legislation continually changes, can be difficult to keep up with.

Reviewing internal training and education

Continuous internal training and awareness programmes help HR teams, recruiters and hiring managers stay up-to-date with the latest regulatory requirements and ethical recruitment practices. As compliance standards evolve, so must the knowledge and skills of those involved in recruitment – meaning training material must to subject to regular updates.

Prioritising recruitment compliance in 2025

As we step into 2025, the complexities and legal implications of recruitment compliance are clear. UK businesses who prioritise this are not only safeguarding themselves against potential risks but are also building foundations of trust and brand integrity with current and future employees.

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Initially, IR35 may appear straightforward in principle, but its practical application is far from it. This is where the finer details, sometimes overlooked, become pivotal for compliance. From diligently documenting status determinations to understanding the nuances of each assignment, attention to detail is paramount.

The crucial role of staff training

Ensuring that all team members, particularly those involved in recruiting and overseeing off-payroll workers, are well-acquainted with the nuances of IR35 can help ensure consistent implementation of status determinations.

Training sessions should not only cover the fundamentals of the legislation but also delve into its practical application, including how to scrutinise the finer points of a worker’s engagement.

Your organisation can choose between a generic, ‘off the shelf’ training package – which can be tailored with your own content to better reflect your business – or a fully bespoke solution developed in collaboration with an external training provider. HMRC advises that businesses significantly impacted by the IR35 off-payroll working rules consider a custom training approach to ensure full understanding and compliance. 

Steps also need to be taken to ensure this training remains at the front of people’s minds when making status determinations or help them identify changes in working practices that will require a new status determination to be issued. That’s why refresher training and regular engagement of the topic is important, to demonstrate to HMRC that you have provided adequate and sufficient support to hiring managers making decisions around off-payroll workers.

Carefully considering IR35 status determinations

Attention to detail is also crucial when evaluating the working practices and assignment requirements of each worker to make accurate status determination statements. The detailed understanding of the particulars of their assignment and work practices will help hiring managers to understand how contractors will go about their work, and help address areas such as supervision, direction, control and right to substitution. Factors such as the obligation of the worker to accept assignments, and their integration level within the company must also be taken into account. These finer details will help to build a picture to support the status determination and consequently, the tax treatment of the worker.

A detailed approach to record keeping

Imagine HMRC initiating an audit into your company’s IR35 adherence – comprehensive records of every status determination, including any disputes and the rationale behind each verdict, will be essential to support this. These detailed records will showcase to HMRC the diligent approach taken in implementing the regulations.

In case of disputes received from contractors when status determinations are issued, having a transparent and detailed record of the decision-making process and the evidence considered can help to expedite conflict resolution and demonstrate to the worker where their working practices fall in scope of IR35.

Understanding your entire supply chain

For organisations who engage off-payroll workers through a supply chain, responsibility for accurate implementation of IR35 may not sit directly with their organisation. Despite this, it’s still crucial that businesses have a good understanding of their wider contractor workforce – and are challenging any working practices that they have concerns about.

Supply chain auditing can help support this, by asking suppliers to detail the workforce they assign to support your projects and work, and checking to ensure tax implications such as IR35 are being fully met.

If you’re not familiar with supply chain auditing, our Linx team provide a bespoke service to work with clients to build an auditing process that works for their business. This helps to demonstrate to HMRC that businesses take their responsibilities extremely seriously and have extensive processes in place to check for compliance.

Practical support for IR35

Linx’s whitepaper, Ensuring IR35 compliance for your business, provides practical support and areas where organisations should be focusing their time to help maintain IR35 compliance.

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Since its roll-out in 2021, IR35 has become a crucial factor for businesses in the Private Sector. As HM Revenue & Customs (HMRC) proactively scrutinises off-payroll working regulations, organisations must prioritise their efforts to ensure compliance. Preparing for potential HMRC assessments is paramount to meeting IR35 requirements and safeguarding business operations, but comes with a hefty administrative burden. 

When do IR35 rules apply?

IR35 off payroll working rules apply to medium and large-size companies as the end user client, who are engaging contractors to provide services through a PSC, where the contractor would be considered an employee if engaged directly. 

It’s important to note that IR35 applies on a contract-by-contract basis, and each engagement must be individually assessed. Misclassification can occur if the contractual terms do not reflect the actual working practices, so regular reviews and accurate Status Determination Statements are essential for compliance. 

Determining the client

To comply with off-payroll working regulations, it is crucial for organisations to have a clear understanding of contracted out services and determine who the client is according to HMRC.

This involves assessing operational processes and comparing them to any contractual arrangements. The organisation issuing a contract should not have control over who is engaged to deliver the service or how these individuals are contracted. If the organisation maintains control over hiring arrangements, it signifies that the commercial relationship is not a contracted out service. In this case, the organisation will be considered the client by HMRC for off-payroll working rules, regardless of how the contract is labelled.

Statement of works

When managing external supplier arrangements, it is common to use a statement of work document. This document outlines how the work will be performed, including milestones and deliverables, but it should be noted that a statement of work does not constitute a contract.

The details within the Statement of Work play a crucial role in determining whether the services are indeed being delivered through a legitimate contracted out service. However, it is important to note that simply having a contractual agreement does not automatically exempt the services from the off-payroll working rules. It is imperative that an organisation’s Statement of Works model isn’t perceived as window dressing by HMRC, and isn’t seen to be breaching the rules of IR35 legislation. 

Status determination statements

In order to ensure compliance with IR35 regulations, organisations must have robust procedures in place for making status determinations and the individual responsible for making the final decision on each worker’s IR35 status must have a comprehensive understanding of the specific arrangements. This could involve designating one person within the organisation to make the ultimate decision or employing a team consisting of hiring managers, legal, procurement, and HR representatives to approve status determinations.

Making a status determination requires taking into account a range of information, and HMRC places great emphasis on consistency when reviewing a business’ IR35 practices. A business may choose to use decision-making tools to assist with making status determinations. These can provide clear evidence of the determination decision but rely on accurate information input. While it is not mandatory to use HMRC’s decision tool, Check Employment Status for Tax (CEST), it is the only tool HMRC will support when the information used is correct.

Organisations have a responsibility to ensure ongoing accuracy of status determinations and should conduct reassessments when they believe significant changes have occurred that may affect the original determination, so it is best practice to plan regular reviews, issue new status determination statements for individual assignments that have changed, and confirm that workers engaged based on role-based determinations still align with grouped working practices.

Disagreement process

Organisations issuing status determination statements must establish a transparent process to manage disputes, which may be raised by workers or their recognised employers.

Valid disputes must include the specific grounds for challenging the determination, aligning with the indicators of employment status. Disagreements submitted without providing a rationale may be rejected. However, disagreements accompanied by reasons must be investigated before rejecting them.

When handling disputes, it is imperative to carefully consider the arguments presented, respond within 45 calendar days of receiving the dispute, and continue applying the tax arrangements based on the existing determination. In cases where assignments fall within the determined scope, tax deductions should still be implemented while the dispute is under review.

Outsourcing off-payroll working responsibilities

Organisations have the option to outsource off-payroll working responsibilities to a third party, which can ensure impartial and transparent implementation. This can be an excellent alternative for organisations without the internal skills and expertise necessary to navigate IR35 regulations.

However, even when organisations outsource IR35 they are still responsible for:

• Accurately identifying off-payroll workers who fall within the scope of the regulations
• Producing informed status determination statements for these workers
• Issuing the determination statement to all parties involved in the supply chain
• Implementing compliant PAYE operations when they are deemed employers

Internal auditing

Regular reviews of your organisation’s off-payroll working activities and adherence to IR35 rules are crucial. Conducting periodic internal audits ensures consistent processes and accurate status determination statements, allowing for necessary adjustments to be made and effectively communicated within your business. To ensure an independent and comprehensive review, organisations may choose to engage a specialist consultancy partner to establish the internal auditing process and collect the necessary information for the audits.

Supporting organisations with IR35 compliance

At Linx, our team of experts specialises in helping businesses achieve and maintain compliance with IR35 regulations. We offer comprehensive services to ensure organisations meet the best practice guidelines advised by HMRC, designing and delivering bespoke training programmes to ensure consistent understanding and implementation of IR35 processes throughout your hiring community.

If you’re interested in acquiring a better understanding of the legislation and how your business can respond to its requirements, take a look at our free whitepaper on ensuring IR35 compliance for your organisation, and feel free to connect or reach out to Richard Hanson if you’d like to discuss your needs further.

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