IR35 is a piece of government legislation created to help distinguish genuinely independent contractors from those who are essentially disguised employees.
It was introduced by HMRC in 2000 to deal with the problem of contractors working full time through a personal service company for tax advantages.
Everyone who is a contractor working under the IR35 ‘status’ effectively determines their tax position with HMRC. The end hirers as in companies who employ the services of the contractor must scrutinise the roles and responsibilities of every contractor, they hire according to the rules prescribed under IR35.
The outcome of a Status Determination Statement ( SDS ) completed by the hirer will determine whether a contractor is genuinely independent and takes the risk of self-employment – and therefore entitled to tax advantages – or if they are essentially performing the role of a PAYE employee.
If a contractor’s relationship with their end hirer falls inside IR35, they will be taxed according to PAYE. If it falls outside, they will be taxed as a Limited Company, where they can primarily withdraw funds as dividends.
Here are the IR35 changes made in the Private Sector in 2021
When IR35 was first introduced in 2000, contractor’s themselves were responsible for self-assessment. The regulations were changed in 2017, to make Public Sector hirers responsible for assessing contractors instead.
In April 2021 Private Sectors hirers will join them, providing every contractor with a Status Determination form that clearly states their employment status under IR35.
Assessment and status of the SDS
A contractor’s IR35 status effectively determines their tax position with HMRC. It is assessed by the hirer completing an SDS on the contractor’s behalf.
IR35 is legislation used by HMRC to work out whether a contractor should be taxed as an employee according to PAYE rules, or on a limited company basis, withdrawing funds primarily as dividends. A contractor’s IR35 status therefore determines which one applies to them.
The system used to establish a contractor’s status is called an SDS. This assessment uses three key factors in working a status out: supervision, direction, and control, right of substitution and mutuality of obligation.
Generally, the greater the supervision, direction and control imposed by an end hirer, the more likely it is that the contractor’s status will fall inside IR35, and they will be taxed under PAYE.
It is the end hirers responsibility to assess IR35 status, irrespective of whether it’s a public or private sector contract. They need to complete an employment assessment checklist which takes into consideration the key IR35 indicators
What is an SDS? – (Status Determination Statement)
An SDS or status determination statement, is a document that summarises an end hirers IR35 assessment for a specific contractor. It determines whether they fall inside or outside IR35, and therefore how they will be paid and taxed.
If you work as a contractor, then any end hirers you work for are responsible for assessing you for IR35 and providing you with an SDS.
Your SDS is basically a summary explaining how they reached their decision about your IR35 status. It will confirm whether you are captured or not, and how you will be paid for the work you complete for them. Every new contract – or change that is made to a current contract – will require a new SDS.
There is no set template for an SDS, but end hirers are obliged to include whether a worker would legally be an employee if they were directly engaged by them. They must provide clear reasons for their conclusion and show that they have taken reasonable care in making the decision.
If you disagree with an end hirers IR35 assessment and wish to contest the SDS, you can request an end hirers review by appointing an advisor who specialises in IR35 legislation.
If you challenge the decision, the end hirer must respond within 45 days – either by confirming their current assessment or issuing you with a new SDS with the revised decision.
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