IR35 reform: a limited company contractor’s guide to Reasonable Care

Out of all the IR35 reform-related HMRC Employment Status Manuals to suddenly remerge after their disappearing act, the manual on Reasonable Care is in my view the most important for limited company contractors between now and April 2020, and beyond, writes Rebecca Seeley Harris, founder of off-payroll rules advisory Re Legal Consulting.

Reasonable Care: an introduction

So let’s recap. Under the draft off payroll reforms, legislation due to come into force from April 6th 2020 places a duty on the client to take ‘reasonable care’ when deteremining whether the contractor should be inside or outside IR35

If the client fails to take reasonable care, the client (also known as ‘the engager’) will be responsible for making the payments of tax, NICs and Appreticeship Levy, and paying these to HMRC. This liability will remain with the client unless it takes reasonable care in reaching its conclusion, although there is no timeframe attached to when the client has to take reasonable care by.

Horses for courses

According to HMRC, ‘reasonable care’ means that clients should act in a way that would be expected of “a prudent and reasonable person in the client’s position.” And HMRC recognises in its guidance that clients’ circumstances will vary significantly. In order to discharge the responsibility, the client will be judged according to their abilities, experience and circumstances. So, for example. HMRC would expect a higher degree of care from a large multi-national with its own internal function, than a much smaller entity.

Next, each client will be expected to make a complete and correct determination and to preserve the records to evidence how the decision was reached. Standard document retention rules will apply to the Status Determination Statement (SDS) according to tax legislation and, no doubt, GDPR. A client with a small workforce might only need a simple regime, although HMRC warns that it must be followed accurately. Whereas, a client with a larger workforce might need a more sophisticated system. Please note, the HMRC guidance talks about the size of the workforce rather tha the size of the client.

The burdens for businesses

In the Revenue’s view, ‘reasonable’ would include a person with limited ability or understanding of employment status or IR35 to take care to find out about the correct tax treatment and to seek the appropriate advice. So in HMRC’s view, whatever its size, it is likely that the client will need to seek external advice, unless as a large client they have it in-house. To me, this seems to be a disproportionate burden on the smaller companies.

According to HMRC, examples of behaviours that would indicate a client has taken reasonable care include, but are not limited to:  

  1. Accurately applying and keeping a record of the employment status principles.
  2. Accurately completing HMRC’s Check Employment Status for Tax (CEST) tool.
  3. Applying HMRC guidance on determining status.
  4. Seeking the advice of a qualified, professional advisor.
  5. Having someone with a good understanding of the work to be undertaken involved in the determination process.
  6. Checking existing individual determinations to ensure they remain valid / accurate.
  7. Reviewing the processes being applied and amending for future determinations where necessary.
  8. If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.
  9. Ensuring they check and review processes of other parties where they subcontract the determination process to another party. The client remains responsible for the accuracy of  the SDS even if it subcontracts that responsibility to another party.

In my view, this is quite a heavy administrative burden on all businesses because in order to take reasonable care, HMRC are saying that this is a continual process of evaluation not only in doing the assessments but, also, in keeping current on the employemnt status principles and guidance. It is likely that HMRC will expect the client to train someone internally to be responsible for employment status and for carrying out the assessments.

Further according to HMRC and its manual (ESM10014), examples of behaviours which do not constitute reasonable care include, but are not limited to:

  1. Determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.
  2. Determining that the off-payroll working rules apply 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.
  3. Failing to reconsider determinations where there has been a material change in circumstances.
  4. 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 working rules.
  5. Inputting inaccurate information into CEST.
  6. Failing to take into account all relevant evidence.
  7. The person tasked with completing the SDS does not possess the knowledge required to complete it and is not provided with the required level of support.
  8. The client subcontracts the SDS process to another party and does not confirm the accuracy of that conclusion and the reasons for it.

Blanket bans

In 1 and 2, above, HMRC are clearly stating that blanket bans do not constitute reasonable care. On that basis, if an organisation puts in place a blanket ban, they remain liable for the tax and NICs and Apprenticeship Levy deductions. Even if the organisation simply says they are not dealing with Personal Service Companies any more, as many have done, there is a very strong argument that such non-dealing with PSCs would consitute a blanket ban, in my opinion. It will be very interesting to see whether HMRC takes action over these flagrant abuses by the very largest of companies. 


HMRC does approve of role based IR35 status assessments as long as the contractors are engaged under the same terms and conditions and work under the ‘same’ terms and conditions in practice. Please note, HMRC does not say ‘similar’. HMRC warns though that if the client has not taken reasonble care, they remain liable for the dedutions and paying these to HMRC. This is the case even if another party has already made deductions in line with the original determination.

The remainder of the points in HMRC manual make it clear that the client has to have adequately trained someone internally to have a clear grasp of the rules. Ensuring that the ‘status officer,’ if you like, has sufficient knowledge on the subject, or the organisation outsources the process. If the organisation outsources the process, though, they are still tasked with confirming the accuracy of the conclusion and the reasoning for it.

What HMRC expects (continued)

There is a very clear message here that HMRC expects the client to be knowledgeable, as they should be, but that they must take responsibility if they use an outsourced service or advice. From my point of view, I would always say use CEST, simply because according to HMRC it consitututes ‘reasonable care’ and if you get an ‘outside IR35’ result, with a corrrect input, you have more chance of being outside. It is also possible for the contractor to use CEST in the challenge process (although there are of course various other commercial services for IR35 contract reviews).

Please note, if you do use a commercial tool, make sure of two things -- that it has been independently verified, and the outcome is insured. There are many tools out there now and some are probably better than others. HMRC will expect you to take ‘reasonable care’ in instructing external resources, so do your ‘due diligence’

Final considerations

But remember, regardless of whether it is CEST or a commercial tool, the outcome is only as good as the input.

Lastly, also remember, if the client has taken reasonable care and fulfilled its other duties, the duty to deduct tax and pay it to HMRC will not rest with it. Contractors and other contractual parters should be aware, however, that this is the case even if the client got the decision wrong.

Monday 17th Feb 2020
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