What to do if you disagree with an IR35 status determination statement (SDS)

Under the off-payroll working rules, the end client is usually responsible for issuing a status determination statement (SDS).

The SDS states whether the contract is inside or outside IR35 and the client’s reason for the decision.

In practice, disagreements have been commonplace since the Off-payroll rules were implemented.

Contractors will often receive an SDS decision that they believe does not properly reflect the contractual terms and circumstances of the engagement, or that is based on a generic assessment (e.g., a ‘blanket’ decision by the client).

In this guide, we explain what you can do if you believe an SDS is wrong, and how the disagreement process works in reality.

If you disagree with an SDS, you have the right to challenge it. The client must respond within 45 days of receiving your representations and either confirm or revise their decision. During this process, the existing determination continues to apply.

When can you challenge an SDS?

You can challenge an employment status decision where:

The SDS does not properly reflect the contractual terms and circumstances of the engagement
The Statement has misinterpreted key employment status factors, such as control, mutuality of obligation, or substitution.
The client’s decision relies on inaccurate, assumed or unverified information, including information entered into the official CEST tool
The SDS reasoning is vague, generic, or incomplete

If you disagree with the SDS, you need to provide specific reasons, rather than simply saying that you disagree with the binary result.

The disagreement process can also be used by the deemed employer where it disagrees with the client’s determination.

If it is not clear which organisation is the deemed employer or where the PAYE responsibility sits, our IR35 Responsibility Checker can help map the position before you go further.

How the disagreement process works

The off-payroll legislation outlines how the disagreement process should work. See ESM10015 for more details.

Once you submit a disagreement:

The client must consider your representations, whether verbal or written.
They must respond within 45 days of receiving the representations.
They must either confirm that the original determination is correct and give reasons for that conclusion, or issue a new SDS with a different conclusion. They must take reasonable care in doing so.
If a new SDS is issued, it must state the date from which the new conclusion applies.

If the client fails to complete the disagreement process within 45 days, responsibility for deducting and accounting for the relevant PAYE and NICs can pass to the client until it complies with its obligations.

The client is under no obligation to agree with you, however strongly you feel about the original decision. The key for clients is to carefully consider your representations and respond according to the steps outlined in the legislation.

What to include in a disagreement

You are far more likely to succeed in a disagreement if you provide a well-structured, detailed representation, rather than a generic objection.

The aim is to show, with evidence, why the determination does not properly reflect the contractual relationship and circumstances of the engagement.

This will include information on your:

Working arrangements – relevant evidence about how the engagement operates
Contract terms – the rights and obligations agreed between the parties
Specific IR35 tests – refer to the key employment status tests, not generic arguments

For example:

If the client’s control over you is limited, explain the contractual rights relating to how, when and where you carry out your work and how the engagement operates in this respect
If you have a right to substitution in your contract, explain the scope of that right and why it is genuine. A substitution right does not have to have been exercised to be relevant
If there is limited mutuality of obligation during the engagement, explain the obligations on both parties in relation to offering, accepting and performing work

Where possible, refer to any of your contract-related documentation. This could include emails, statements of work, or evidence that you are working in business on your own account.

The contractual terms and other evidence about the engagement should be considered together. In IR35 tax cases, contractual terms are established using ordinary principles of contractual interpretation before the employment status tests are applied. Evidence about the circumstances in which the agreement was made and how the engagement operated can be relevant, but genuine contractual terms cannot simply be disregarded because they were not exercised in practice. This distinction is important following Atholl House and limits the application in tax cases of the approach taken in employment-rights cases such as Autoclenz v Belcher.

What happens after you submit a challenge?

Once you submit your disagreement, the client will review it internally, which will often involve people from HR, legal, or external advisers.

There are only two possible outcomes:

The SDS is upheld – the client confirms its original determination
The SDS is revised – a new determination is issued with a different conclusion

Whatever the outcome of the disagreement process, the client must provide reasons.

It is important to note that the existing determination continues to apply during the review period unless and until the client changes it.

What if the client refuses to change the SDS?

Unfortunately, due to the nature of the off-payroll legislation, your options are limited if the client maintains their original decision, as there is no further statutory appeal within the client-led disagreement process.

There is no independent tribunal route for appealing the SDS through this process, and HMRC doesn’t act as an arbiter at this stage.

In practical terms, contractors typically have to decide whether to:

Continue working under the existing determination
Renegotiate the current contract terms or working practices
Terminate the contract, or leave at the current end date.

This is one of the defining features of the off-payroll rules – and one which has been widely criticised. The client makes the final determination for the purposes of the Chapter 10 disagreement process, although the tax treatment may subsequently be examined by HMRC.

SDS and “reasonable care”

Clients must take reasonable care when making IR35 determinations.

Despite the limitations of the client-led disagreement process, this is a clear incentive for clients to follow the rules. A failure to take reasonable care can leave responsibility for PAYE and NICs with the client, with interest and penalties potentially arising depending on the circumstances.

Some examples of where care may not have been taken include:

Using blanket determinations across entire projects or roles without considering material differences between engagements
Using automated tools with inaccurate, assumed or insufficiently verified information
Ignoring relevant evidence provided by the contractor

Common mistakes when challenging an SDS

Some common issues contractors face when challenging an SDS include:

Arguing based on the intention of the parties without addressing the contractual rights and obligations
Making arguments solely based on contract wording without addressing the wider evidence relevant to the engagement
Failing to address the specific reasons given in the SDS
Submitting informal or poorly structured challenges

A clear, evidence-based response is far more likely to be taken seriously.

The strongest challenges are specific, evidence-based, and focused on the contractual terms, circumstances of the engagement and the reasons given in the SDS.