When a client has to operate the Off-Payroll Working rules in Chapter 10 of ITEPA 2003, they must decide whether a contractor is inside or outside IR35.
This decision must be communicated formally in a document called a Status Determination Statement (SDS).
The SDS is central to the Chapter 10 framework. It confirms the client’s decision, explains the reasons behind it, and helps demonstrate that the client has taken reasonable care.
If the client fails to meet its statutory obligations when making and communicating the determination, it can become liable for tax and National Insurance, even if an agency sits in the chain.
If you are unsure who should make the IR35 decision or which organisation has the PAYE and National Insurance responsibility, use our IR35 Responsibility Checker.
What an SDS must include
The SDS must contain two things:
- a clear decision on whether the engagement is inside or outside IR35
- the reasons for reaching that decision
The client must give the SDS to the worker and to the person or organisation with which the client contracts. Where there are further parties in the labour supply chain, the SDS must then be passed down the chain as required.
If the client does not meet these requirements, responsibility for the relevant PAYE and NIC may rest with the client.
Read HMRC’s outline of the SDS requirement here: GOV.UK – Client responsibilities.
The concept of ‘reasonable care’
All clients who operate the OPW rules are obliged to take reasonable care when they prepare and issue an SDS.
This means showing that the determination was made thoughtfully, using accurate information about the contractual terms and relevant circumstances of the engagement.
According to HMRC’s Employment Status Manual ESM10014, ‘reasonable care’ may include:
- considering the relevant contractual terms and how the engagement operates
- seeking input from managers who understand the work
- checking internal records and onboarding notes
- using a consistent assessment process while taking account of the particular engagement
- reviewing the determination if the contractual terms or working arrangements change materially
When liability sits with the client
If the client does not take reasonable care or fails to meet its obligations when making and communicating the SDS, it can become responsible for PAYE and NICs.
This rule applies even where an agency sits in the chain between the client and contractor. The statutory liability rules depend on whether each party has met its obligations under Chapter 10, rather than simply on whether the status conclusion ultimately proves to be correct.
Here are some common situations where liability can remain with, or shift to, the client:
- No SDS issued before the relevant payment is made
- The determination is made without taking reasonable care
- The SDS does not give reasons for the conclusion
- The SDS is not given to the worker or to the person the client contracts with
- The client fails to meet its obligations under the status disagreement process
High-profile public bodies have faced large tax bills following failures in the application of the off-payroll rules, underscoring the importance of hiring a specialist firm to conduct an IR35 audit and support ongoing compliance.
Disagreement and dispute process
Under Chapter 10, clients must operate a status disagreement process. The worker or the deemed employer can make representations if they disagree with the client’s determination or the reasons given for it.
The client must respond within 45 days of receiving the representations. It must either confirm that its original conclusion is correct and give reasons for that decision, or issue a new SDS containing a different conclusion.
The existing determination continues to apply unless and until the client changes it. If the decision changes, a new SDS must be issued and communicated to the relevant parties.
Read our guide to the client-led SDS disagreement process.
Read the official guide to the disagreement process on GOV.UK.
When an SDS must be updated
If the contractual terms or working arrangements change materially, the SDS may need to be reviewed and possibly updated.
For example, if the contractor takes on new responsibilities, begins working under closer supervision or shifts to a fixed schedule, the original determination may no longer be appropriate.
Clients should keep their decisions under review and reconsider the SDS if the nature of the engagement changes in a meaningful way.
What responsibilities do agencies have?
Recruitment agencies must:
- operate PAYE for inside IR35 engagements where they are the fee-payer
- pass the SDS to the next party in the supply chain where required
- keep appropriate records of payments and SDS documents for compliance purposes
If an agency receives an SDS and is required to pass it to the next party in the chain but fails to do so, responsibility for the relevant tax and NIC may move to that agency. The rules are designed to ensure that the determination reaches the party responsible for operating PAYE.
Why SDS documentation matters
An SDS is more than a formality. Together with the underlying status assessment and supporting records, it can provide evidence that a client has properly considered the employment status of a contractor and applied the Chapter 10 process.
Clear reasoning can help prevent disputes, reduce compliance risk and demonstrate the process followed if HMRC reviews the engagement.