How do you determine IR35 status?

Determining IR35 status is a complex process that requires a thorough understanding of the legislation and a close examination of the nature of the working relationship between the contractor and the end client.

Evaluating status is complex, with no one factor being determinative. It requires detailed knowledge of decades of employment status case law, contractual interpretation, contractual construction, and a thorough understanding of how HMRC manages enquiries and judges make status decisions. IR35 status is not an accounting matter. It is a legal matter.

To evaluate the IR35 status, creating a Status Determination Statement (SDS), defined in the off-payroll legislation, is prudent.

An SDS should be a comprehensive statement which includes the following:

1. Declaration of the deemed employment status
2. Reasons for the status conclusion
3. Information used in making the determination
4. Signatures of both parties that agree the SDS is entirely correct

For an SDS to be "valid", as per the legislation, only the first two elements must be present, which has led some firms to provide a flimsy set of reasons with little detail.

Protracted enquiries are considerably more costly for firms because they must pay experts more fees to defend their position. The determination is significantly weakened by withholding the information used in determining the contractor and choosing not to ask the parties to sign an SDS. It makes it more likely that any investigation by HMRC would become protracted.

The legislative requirement for an SDS was introduced in April 2021 and is intended to help combat the misclassification of status due to non-compliant blanket or role-based assessments.