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HMRC internal manual

Employment Status Manual

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: Status Determination Statement (SDS)

This is a draft and may be subject to change

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

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

It is the public authority and medium and large non-public sector clients’ responsibility to determine whether the off-payroll working rules apply to an engagement. The client should then 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. 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 it.

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.

If the client does not issue a SDS, the worker can ask why. If the reason is because they are 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.

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 liable. 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, NICs and apprenticeship levy, if due, and paying these to HMRC.

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, NICs and apprenticeship levy, if due, and paying these to HMRC. 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.

The SDS should be issued on or before payment is made. If payments are made before the SDS is issued, this will result in responsibility for tax, NICs and apprenticeship levy sitting 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 entity, then it should withdraw the SDS and the deemed employer should make corrections through payroll so deductions can be refunded.

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 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, NICs and apprenticeship levy and paying these to HMRC will not rest with the client.  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 are 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 a 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 provide a copy of the SDS to the worker containing their 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, NICs and apprenticeship levy and paying these to HMRC. If the SDS is passed to Recruiters Ltd, it is 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 is responsible for the deduction of tax, NICs and 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 decide not to issue a SDS to the worker or to Recruiters Ltd, who is the fee-payer, because they believe 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 responsibility by issuing a SDS to the worker and person they contract with, the liability for tax, NICs and apprenticeship levy rests with them, not with the fee-payer, Recruiters Ltd.