Businesses taking needless risks regarding IR35 reform

Many firms are compliantly managing IR35 changes but others must increase their efforts

Following the introduction of IR35 reform in the private sector in April, it has come to light that many businesses still have work to do in order to meet all of their legal obligations under the changes.

This became clear after exclusive Qdos research revealed that just over half (56%) of 1,846 contractors had been issued with a Status Determination Statement (SDS) by their client. This is despite an SDS being fundamental to IR35 compliance. 
 

What is an SDS?

An SDS is a document that outlines a contractor’s IR35 status, providing an explanation of the factors leading to a particular decision. This information is vital in demonstrating that reasonable care has been taken when assessing IR35 status and ensuring a more transparent and fair decision making process.

End clients are required to send an SDS to the contractor and the second party in the supply chain, which is often the recruitment agency. Failure to provide a contractor with a compliant SDS will see the end client liable for IR35, irrespective of whether they are the fee-paying party or not. 

Needless to say, that as many as 44% of contractors have said they are yet to receive an SDS from their client is a cause for concern. It also serves as an important reminder to businesses that IR35 requires ongoing management – in other words, the job isn’t complete simply because reform has now been rolled out.
 

Absence of SDS could result in status challenges 

This apparent oversight may also explain why so many contractors are considering appealing the assessment handed to them. According to our recent study, one in two contractors will (39%) or may (11%) challenge their client’s IR35 determination. 

Looming disputes raise another important question – this time about the methods used to assess IR35 status. Previous studies have shown contractors distrust HMRC’s IR35 tool, CEST, which, if relied on by a business, could easily increase the likelihood of an appeal. 

Regardless of how an end-client has decided a contractor’s IR35 status, businesses are advised to develop a transparent and compliance-led appeals process – one that ensures a contractor has a fair shot at challenging and overturning incorrect IR35 determinations and therefore ensuring compliance.
 

Two in three contractors placed inside IR35 

Also of note in our survey was the finding that 65% of contractors said they have been placed inside IR35 by their client, with the remaining 35% classed as outside the legislation. 

While this indicates that plenty of businesses are continuing to engage contractors outside IR35, there is a big disparity between this research and the results achieved by the Qdos Status Review facility. 

When supporting over 2,800 businesses with their IR35 processes and having carried out more than 32,000 thousand independent IR35 status reviews for these organisations, 86% have been assessed as outside IR35. 
 

Umbrella and PAYE-only ultimatums needless

In addition, nearly two thirds (64%) of contractors have been told by their client that they can or must work via an umbrella company in the lead up to reform. The reason for this trend is because IR35 doesn’t apply to umbrella workers, who become employees of the umbrella company.

However, given that IR35 reform is manageable with the right approach, insisting that contractors become umbrella workers is unnecessary. There are also grave concerns over non-compliance in the umbrella industry, with the government under mounting pressure to regulate this sector and stop the proliferation of disguised remuneration schemes. 

So what can businesses take from these findings? 

To conclude, our research – which is one of the first that assesses the post IR35 reform landscape – shows that while many companies are handling the reform compliantly, there is evidently still work to be done for all businesses to successfully navigate the changes.