If your client tells you your contract falls inside IR35, you don’t have to accept their decision without a fight.
Under the off-payroll working rules, contractors can challenge a Status Determination Statement (SDS) if they believe the client has reached the wrong conclusion.
The client must take your reasons into account and respond within 45 calendar days of receiving your disagreement.
There’s never any certainty that a challenge will succeed, but it does mean your client must review the points you raise and either stand by its original decision (and provide their reasons for doing so), or issue a brand new SDS.
What is a Status Determination Statement?
For medium and large private sector clients, and public sector organisations, the client is normally responsible for deciding whether the off-payroll working rules apply.
The client provides the decision to the contractor in a Status Determination Statement. A valid SDS should say whether the contractor would be treated as employed or self-employed for tax purposes if engaged directly, and explain why the client reached that conclusion.
The client must also have taken reasonable care when making the decision.
You can find out more about the fundamentals of IR35 and the off-payroll rules in our plain-English guide to IR35. We also address many common IR35-related questions in our IR35 status and rules FAQ.
Can you challenge an inside IR35 decision?
Yes. If you disagree with the determination, you can raise a disagreement directly with the client. HMRC says the worker should identify the determination they disagree with and explain the reasons why they believe it is wrong.
You can raise a disagreement at any point up until the last payment is made for your services.
Read HMRC’s off-payroll working guidance for contractors.
How do you raise your disagreement?
If you think you have been placed inside IR35 incorrectly, you need to raise the issue with your client and explain why you believe the SDS is wrong. You can do this verbally or in writing, but keeping it in writing is preferable, as it gives you a clear record of what you challenged and when.
The more detail you provide, the stronger your case may be, such as outlining the parts of the SDS you think are wrong. This can include how you carry out your work on a day-to-day basis (known as your ‘working practices’), as well as the written terms in your contract.
For example, the SDS may state that the end-client controls how the work is carried out, but in real life, you decide how the work is done and have been hired to deliver a specific piece of work.
The SDS may state that there isn’t a genuine right of substitution, even though you believe this right is included in the contractual terms and that you can provide a substitute if you’re unable to work.
Other points may include financial risk, an obligation to make good any defective work, and the extent to which you’re integrated into your client’s organisation.
What happens after you challenge the determination?
The client must consider the points you have raised and give you their written response within 45 calendar days.
There are two possible outcomes:
- If the client decides the original determination was correct, it should tell you that the decision stands and explain why.
- If the client agrees that the original decision was wrong, it should withdraw the old SDS and issue a new one, including the date from which the new determination applies.
Remember that the original SDS remains in place while your challenge is considered.
Read more in HMRC’s client-led disagreement guidance.
What if the client ignores your disagreement?
The client has 45 days to consider your disagreement and either confirm its original decision or issue a new SDS.
Importantly – and this is one of many criticisms of the off-payroll legislation – there is no further formal appeal stage if the client stands by its decision.
However, if the client fails to respond within 45 days of receiving your disagreement, responsibility for deducting and paying the relevant PAYE and National Insurance on later payments can move from the fee-payer to the client until it deals with the disagreement. The same applies to any associated Apprenticeship Levy liability.
Can you challenge a blanket decision?
Since the off-payroll rules were introduced into the private sector in April 2021, many larger clients have preferred to ‘blanket ban’ limited company workers, rather than deal with the potential liability of getting status determinations wrong.
This typically means that contractors can only take on the work if they agree to work via umbrella companies, where IR35 is no longer a consideration.
A blanket refusal to engage personal service companies is different from making a blanket ‘inside IR35’ determination.
If a client states that a role is umbrella-only and will not deal with your limited company contractors, that is generally a commercial decision rather than an SDS you can challenge via the formal disagreement process.
The disagreement process only becomes relevant where the client has actually made an IR35 determination on an engagement through your PSC.
What if the client used CEST?
It doesn’t matter what tools a client uses to make a determination – whether this is the official CEST tool or another type of software.
An IR35 status test produces results based on the information fed to it, so if the answers the client gives don’t reflect the contractual terms or your working practices, they could be inaccurate.
Read more in our guide to HMRC’s CEST tool.
Is an independent IR35 review worth it?
Yes, if you don’t agree with an SDS, an independent IR35 specialist may provide the ammunition you need to challenge it.
A professional contract review will examine both your contract terms and your working practices, and should help pinpoint exactly where the client’s reasoning is wrong. Or the review may support the client’s view.
Find out more about our IR35 status review service.
What if the client still insists that you are inside IR35?
Unfortunately, there is no further formal right of appeal under the client-led disagreement process. If the client considers your challenge and still believes the contract is inside IR35, that determination continues to apply to the engagement.
Clearly, you have to make a commercial decision at this point – either carry on with the contract on that basis, or decline the contract (or the renewal). In a tough market, you may not really have a choice.
However, you can take a separate route after the end of the tax year if you still believe too much tax and National Insurance has been paid. HMRC allows workers to challenge the disputed tax treatment through Self Assessment and make a separate claim for National Insurance.
In the future, if your working arrangements change significantly, you may want to challenge the SDS again.
Do you need some IR35 advice?
If you have any concerns about your IR35, speak to one of our experienced accountants, who can help with questions about IR35 and the off-payroll working rules. Complete our request a call back form and an accountant will contact you at a convenient time.
