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One of, if not the most important change to the recent off-payroll legislation is the ‘reasonable care’ requirement. This requirement is placed upon the businesses making IR35 status determinations.
But what does, and doesn’t, constitute reasonable care when conducting an IR35 status determination? Whilst there is no black and white legal definition, HMRC have produced some guidance attempting to help define reasonable care, which they define as acting “in a way that would be expected of a prudent and reasonable person in the client’s position”.
Reasonable care applies individually to each engagement and the circumstances attached to it. HMRC have tried to be helpful in providing examples of what reasonable care constitutes (spot the one that isn’t overly helpful…).
– Accurately applying and keeping records of the employment status principles
– Applying HMRC guidance on determining status
– Accurately completing HMRC’s CEST tool
– Seeking the advice of a qualified, professional advisor
– Having someone with a good understanding of the work to be undertaken involved in the determination process
– Reviewing the processes being applied and amending for future determinations where necessary
– Undertaking new status determinations due to material changes to a worker’s terms & conditions or working practices
– Ensuring processes are reviewed and checked where the determination process is subcontracted to a third party.
From the above examples of what reasonable care constitutes, we can see that being able to evidence IR35 status and how the decision was come to is imperative to making sure reasonable care has been taken.
Using CEST is questionable given the known issues and criticism it has faced, and for valid reason we may add. Using external expertise is advised, especially where resource allows such i.e. in large businesses, whilst we’d always recommend using a third-party system such as the Contractor Compliance Portal, especially given it’s free to use.
Where a third party and/or their system is used, this does not divest the business of their responsibilities. Regular reviews and checks should be undertaken, as it cannot be overstated to remember that the client remains responsible for the accuracy of the SDS even if it subcontracts that responsibility to another party.
If in the process of making an IR35 status determination a business is found to have not met the reasonable care requirements, then they assume the position of the of fee-payer – even if another entity, usually the recruitment agency, is the actual fee-payer.
The fee-payer is liable for any unpaid tax due should a contractor working outside IR35 subsequently be found to be inside IR35. They also assume responsibility for reporting and deducting tax from payments made to contractors. Consequently, providing a valid and accurate SDS is essential to meeting statutory obligations and avoiding any financial risk exposure.
We’ve seen what reasonable care constitutes, but just as important is what doesn’t constitute reasonable care. Whilst it is by no means exhaustive, HMRC have provided examples as to what they would deems to constitute a lack of reasonable care.
– Determining that every worker who provides their services through an intermediary is caught by the off-payroll legislation without giving any consideration to the specific facts of each individual case
– Determining that the off-payroll legislation applies to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker
– Failing to reconsider determinations where there has been a material change in circumstances
– An absence of any proper support or training within the organisation to enable those individuals responsible for making determinations to properly consider the off-payroll legislation
– Inputting inaccurate information into CEST
– The person completing the SDS does not possess the knowledge and/or have the level of support required to do so
– The client subcontracts the SDS process to a third-party and doesn’t confirm the accuracy of the SDS or the reasons for it.
One thing that HMRC have been completely clear on is that blanket assessments do not meet the reasonable care requirements. End of.
