ESM10012 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: Status Determination Statement (SDS)

Sections 61N and 61NA Chapter 10, Part 2 ITEPA 2003

Regulations 14 and 14A Social Security Contributions (Intermediaries) Regulations 2000

Once the client has determined whether the off-payroll working rules apply to an engagement, it should communicate that decision in the form of a Status Determination Statement (‘SDS’) - (see ESM10013 for what constitutes a valid SDS) to the worker and any third party it contracts with. There is an incentive for the client to pass the SDS to the worker and any third party it contracts with because failure to pass on the SDS will result in the client being responsible for the deduction of tax and NICs, and paying these, along with any apprenticeship levy, to HMRC if due. The legislation does not specify the format or method by which the SDS should be issued, but the client should ensure that the worker is knowingly able to receive or access the SDS. For example, this could be an email, a letter or provided through an online portal.

If there are material changes to a worker’s terms and conditions or working practices, the client should reconsider their original determination to see if it still stands. Changes to terms and working practices could result in changes to status or one engagement ending and new one beginning. For example, a client makes a regular monthly payment of £2,000 to a worker’s intermediary under the terms of a contract. That term is amended, and the worker’s intermediary is instead paid on a commission only basis. The client should reconsider the status under the new terms and issue a new SDS.

Where a change to terms and conditions or working practices results in a new contract this is a new engagement, and the client should consider whether this new engagement is inside the rules and issue a new SDS. If a contract is extended but on exactly the same terms and conditions, this may not be a new contract and as such, no new SDS will be required. However, if an extension results in a new contract, for example because terms were changed or because the client chose to issue a new contract to achieve the extension, then the client should issue a new SDS. If the client fails to issue a new SDS for this new engagement, then the client will be responsible for the deduction of tax and NICs, and paying these, along with any apprenticeship levy, to HMRC if due.

Issuing the SDS to a worker gives them clarity over their tax position as they will know whether payments they receive will already have been taxed, or whether payments will be received gross so will need taxed appropriately. Having the SDS will also allow the worker to understand the client’s reasons for their status conclusion so the worker can decide whether or not they disagree with that conclusion.

The worker or deemed employer can raise representations through the client-led status disagreement process (ESM10015) if they do disagree with a determination or feel a determination is no longer accurate.

The client can confirm its size for the tax year(s) in question in the SDS if it wishes to ensure any responsibility to confirm its size, if asked by the worker or person it contracts with, is satisfied (see ESM10011A).

If the client does not issue the SDS, the worker can ask why. Under the off-payroll working rules a worker has the right to request confirmation of a client’s size (see ESM10011A). If the reason for not issuing the SDS is because it is a small non-public sector client, the worker’s intermediary should determine whether the off-payroll working rules apply, as per the rules in Chapter 8, Part 2 ITEPA 2003. If the client is not a small, non-public sector client, then any potential liability for tax, NICs and apprenticeship levy under the off-payroll working rules would rest with them as they have not issued the SDS.

Where the client sources labour through a third party, they should also issue the SDS to the person they contract with for the worker’s services, for example an employment agency. The legislation incentivises this using the ‘qualifying person’ conditions (ESM10017). If the client doesn’t pass the SDS onto a third party they contract with, there will be no other qualifying persons in the labour supply chain and so the client remains responsible for any tax and NICs due. Therefore, if the client does not pass the SDS directly to the worker and to any third party it contracts with, it will be responsible for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due.

In longer contractual chains, each subsequent recipient of the SDS will be similarly responsible for forwarding on that SDS to any third party they contract with for the same worker’s services, until the SDS reaches the final person in the contractual chain above the worker’s intermediary. Failure to pass on the SDS will result in the person holding it being responsible for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due. There is no requirement to pass the SDS to the worker’s intermediary. It is the client’s responsibility to pass the SDS directly to the worker.

In more complex chains where there are offshore agencies involved, UK agencies will need to be aware that those offshore agencies are not qualifying persons. If the only agency below the UK agency is offshore, the UK agency is the lowest qualifying person. If an offshore agency sits between two UK agencies, the first UK agency will be the only qualifying person until the offshore agency passes the SDS to the lower UK agency. In other words, the first UK agency will need to ensure the other UK agency receives the SDS. Simply passing the SDS to the offshore agency will not move responsibility away from the first UK agency.

For the client, or any subsequent party in the chain, to discharge its liability the SDS should be issued on or before the date any payment is made. If payments are made before the SDS is issued, this will result in responsibility for tax, NICs and apprenticeship levy remaining with the person who hasn’t passed the SDS on.

If a small client issues a SDS because it has wrongly concluded it is a medium or large-sized entity, then it should withdraw the SDS and the deemed employer should make corrections through payroll so deductions can be refunded (see ESM10019).

If a SDS is issued by the client to both the worker and the person they contract with (if there is a third party) and reasonable care has been taken (see ESM10014) when coming to its conclusion (whether that conclusion is correct or incorrect) as to whether the off-payroll working rules apply, then it has satisfied its duties under the rules. If there are parties in the chain between the client and the worker’s intermediary, satisfying these duties will mean responsibility for the deduction of tax and NICs and payment of apprenticeship levy will not rest with the client but with the deemed employer. This does not affect the rules relating to the recovery of debt from other persons (ESM10031).

Standard document retention rules apply to the SDS.

Note – The client is the only party required to send a copy of the SDS to the worker.

EXAMPLE ONE

Retail Ltd is a medium-sized business that secures the services of a worker directly through their own personal service company (PSC). Retail Ltd determines that the role will be caught by the off-payroll working rules so is required to provide the SDS to the worker. As there is no other party in the chain, Retail Ltd has satisfied its duty to provide the SDS. Retail Ltd is responsible for deducting tax and NICs and paying these to HMRC as it is the deemed employer.

EXAMPLE TWO

Retail Ltd is a medium-sized business that contracts with an employment agency, Recruiters Ltd, for a worker. The worker operates through their own personal service company. Retail Ltd determines that the role will be caught by the off-payroll working rules and provides a copy of the SDS to the worker containing its conclusion and reasons. Retail Ltd should also provide a copy to Recruiters Ltd. Failure to do so would mean Retail Ltd is responsible for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC. When the SDS is passed to Recruiters Ltd they become responsible for operating PAYE as they are the fee-payer.

If Recruiters Ltd contracted with another agency for the supply of the worker, Recruiters Ltd would be required to pass the SDS to that agency. Failure to do so would mean Recruiters Ltd remain responsible for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC rather than the agency below them in the contractual chain.

EXAMPLE THREE

Clothing Ltd is a large-sized business that contracts with an employment agency, Recruiters Ltd, for a worker. The worker operates through their own personal service company. Clothing Ltd, as the client, determines that the worker is not caught by the off-payroll working rules and takes reasonable care coming to its conclusion. Clothing Ltd decides not to issue a SDS to the worker or to Recruiters Ltd, who would be the fee-payer if Chapter 10, Part 2 ITEPA 2003 applies, because it believes there is no liability in relation to that engagement.

HMRC later discover that the worker should have been subject to the rules and Clothing Ltd came to the wrong conclusion. As Clothing Ltd did not discharge any potential liability by issuing a ‘not caught’ SDS to the worker and the person they contract with, the liability for tax, NICs and apprenticeship levy rests with them, not with the fee-payer, Recruiters Ltd.

EXAMPLE FOUR

Clothing Ltd is a large-sized business that contracts with an employment agency, Recruiters Ltd, for a worker. The worker operates through their own personal service company. Clothing Ltd, as the client, determines that the worker is not caught by the off-payroll working rules and takes reasonable care coming to its conclusion. On this occasion, different to example three, Clothing Ltd does issue a SDS to the worker and Recruiters Ltd stating its conclusion is Chapter 10, Part 2 ITEPA 2003 does not apply and gives reasons.

It is later discovered that the worker should have been subject to the rules and PAYE should have been operated. Clothing Ltd has discharged its duties under the legislation as it took reasonable care in coming to its conclusion, gave the reasons for that conclusion and issued a SDS containing these to the necessary parties. As Clothing Ltd discharged its duties the liability for tax, NICs and apprenticeship levy does not rest with them, but with the deemed employer.