How to challenge an IR35 SDS (like an employment lawyer would)

Large end clients have a poor reputation at present among the contracting and consulting community for their compliance approach to the new off-payroll working rules (IR35) with blanket PSC bans and umbrella-only PAYE policies. However, not all end clients are like this. In fact, many are listening to contractors and are actively trying to get this right for their workers. 

As part of our series on taking responsibility for IR35, we caught up with employment status and IR35 expert Rebecca Seeley Harris of Re:Legal Consulting to get her perspective on CEST, advice for contractors engaging in proactive IR35 discussions, and tips for tackling SDS disputes with end clients. 

inniAccounts: What types of end clients do you work with Rebecca?

Rebecca Seeley Harris: I work with a lot of industry groups, for example, the university sector, out of hours doctors, aviation, executive and health coaching, and recruitment. I like to get to know the idiosyncrasies of the industry so I can apply the employment status principles appropriately. Each industry has a different language and way of working.

iA: How does the approach to IR35 differ across different sized businesses and sectors?

RSH: You have to apply the employment status test according to the most specific working practices of that industry. For example, in aviation the mechanics might have to invest a lot of money in equipment before they get paid by the client; with doctors, they do not have equipment but they are highly skilled and there is little control.

iA: Tell us what clients are thinking/doing right now about IR35.

RSH: A lot of my clients started preparing in 2019 and some of them continued after the delay was announced, so are well ahead. I am conscious, though, that there are many companies that are still making enquiries about starting the process now.

iA: CEST has a bit of a poor reputation among consultants and contractors. Is this fair? Can you bring another perspective?

RSH: CEST is HMRC’s tool for evaluating status for tax purposes. It is intentionally biased and basically gives you the view that an HMRC status inspector would, but it’s just automated. However, it is a useful tool because it gives you HMRC’s view.

3 Tips for Engaging in Proactive Discussions with End Clients and Challenging IR35 SDS

1. Be proactive, and approach the client

RSH: I think the best way is to find out who is dealing with off-payroll (OP21) within the client organisation and ask to have a chat, first of all. This is to find out whether the client is actually dealing with the issue. If the client does have a dedicated resource for OP21, then it is likely that they are taking it seriously. In which case, you could present them with a statement that you are ‘self-employed’ for tax purposes; this ascertains the intentions of the parties and gives a list of attributes for your business.  For example: your website, PI insurance, business cards, invoicing process, etc.  This all shows that you are a genuine business.

2. Gather supporting evidence

RSH: The supporting evidence for OP21 comes from the working practices. The most effective evidence is that substitution has happened in practice. HMRC view this practice highly but there are certain rules that must be followed for substitution to be valid: the substitute must be paid for by the original contractor. If the substitute is found supplied by another third party, then that would be replacement not substitution.

Outside of substitution, evidence of the lack of supervision, direction and control that the client has in practice is important. For instance, where you work from and other ‘in business’ attributes.

iA: The inniAccounts IR35 Action Planner has a built in Working Practice Assessment tool which allows you to enter supporting evidence, so you can demonstrate and justify the reason for your dispute to your client.

3. Issue a challenge

Challenging an SDS
RSH: First of all, you need to have approached the client before you get a determination, although, in fact, the client should be approaching you first. If you are given a Status Determination Statement (SDS) without any communications from the client, then you should be able to challenge an inside IR35, on the basis that the client hasn’t taken reasonable care. You need to send a formal response to start the Status Disagreement Process and the client has 45 days to respond.

Legal Limitations of CEST
RSH: It is fair to say, in my opinion, that there are some lines of questioning that are pushing the boundaries of a coherent legal argument, mutuality of obligations being one of them. It will also be useful to the contractor to use in the Status Disagreement Process (SDP) to challenge the client’s Status Determination Statement.

With over 20 years’ specialist knowledge, Rebecca is widely recognised as a leading expert in employment status and IR35. She advises clients on employment law and the tax legislation that applies to working with the self-employed, personal service companies (PSCs), sub-contractors and consultants, among others. Rebecca has also written many articles in the professional press, lectured on employment status and was a Senior Policy Adviser for the Office of Tax Simplification (an independent body of HM Treasury) acting as the government’s expert on employment status, small company taxation and the gig economy.

Rebecca’s ebook, CEST Explained, aims to demystify CEST. She also offers bespoke CEST training sessions. https://cesttraining.co.uk/