IR35 and off-payroll working: What constitutes Reasonable Care?

The Off-Payroll Working (OPW) legislation contained in Chapter 10 ITEPA 2003 places a duty on the end-client to take ‘reasonable care’ when determining whether the contractor should be inside or outside IR35. 

There is no such duty on the contractor under Chapter 8 ITEPA 2003, which is known as IR35, and even better known as ‘old’ IR35, writes Rebecca Seeley Harris, a tax lawyer and the founder of ReLegal Consulting.

Failure to take Reasonable Care: the ramifications

If the client fails to take reasonable care, the client or hirer, will be responsible for making the payments of tax, NICs and Apprenticeship 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 imposed to specify when the client has to take reasonable care by.

How does HMRC define Reasonable Care?

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 multinational with its own internal function, than a much smaller entity. Helpfully in terms of size of engager, HMRC has given examples of reasonable care though the lens of both a medium-sized and large-sized company, in ESM10014. One of the examples is a more detailed version of the ‘reasonable care’ example which the Revenue mistakenly published in Feb 2020.

What Reasonable Care does HMRC expect end-users to take?

Further according to HMRC, each client will be expected to make a complete and correct determination and to preserve the records to evidence how the IR35 status decision was reached.

Standard document retention rules will apply to the Status Determination Statement (SDS), according to both tax legislation and the GDPR.

As inidicated earlier, an end-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, HMRC guidance talks in part about the size of the workforce, rather than the size of the client. More helpfully and as I will come onto, the tax department has also spelt out around ten actions that it says constitute reasonable care, and ten it says that don’t.

Define ‘Reasonable’ in ‘Reasonable Care’

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 such advice or expertise in-house.

Nine must-dos to achieve Reasonable Care

According to HMRC (again at ESM10014), 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.

Reasonable Care as an end-client? It’s pretty onerous…

In my view, the above constitutes quite a heavy administrative burden on end-client organisations. In fact, in order to take reasonable care, HMRC are in effect saying that it is a continual process of evaluation -- not only in doing the assessments but, also, in keeping current on the employment status principles and guidance.

Clearly, HMRC expects the end-user to train someone internally to be responsible for employment status and for carrying out the SDSs. The role of status assessments, however, needs to be independent of the person running it so there is continuity if they leave.

Eight examples of NOT taking Reasonable Care

Furthermore according to HMRC, 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.

Do ‘blanket bans’ pass or fail HMRC’s Reasonable Care test?

In 1 and 2, above, HMRC are essentially 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, NICs and Apprenticeship Levy deductions.

Even if the organisation simply says they are not dealing with Personal Service Company (PSC) contractors any more, there is a very strong argument to be made, in my view, that such non-dealing with PSCs would constitute a blanket ban.

HMRC approval, wording, and warnings…

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 here, HMRC does not say ‘similar’.

HMRC warns, though, that if the client has not taken reasonable care, they remain liable for the deductions 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’s ESM10014 make it clear that the client has to have adequately trained someone, internally, to have a clear grasp of the OPW rules. The onus is on the client to ensure that a person I might call the ‘status officer’ has sufficient knowledge on the subject, or if not the organisation should outsource 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 is HMRC’s message on Reasonable Care?

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.

My recommendation is always use CEST, simply because according to HMRC it constitutes ‘reasonable care’ and if you get an ‘outside IR35’ result, with a correct 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).

What about CEST and other IR35 testing tools in the context of Reasonable Care?

Please note, should you use a commercial IR35 status-testing tool, make sure of two things:

  1. That it has been independently verified, and
  2. The outcome is insured.

There are many tools available from the private sector and some are better than others. That probably applies too, to the teams of sales people marketing the tools!

Regardless, HMRC will expect the client to take ‘reasonable care’ in instructing external resources, so end-users must do ‘due diligence.’

Final thought: ‘You only get out, what you put in’

Remember, whether it is CEST or a commercial tool, the outcome is only as good as the input.

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 if there is an agency involved. Contractors and other contractual parties should be aware, however, that this is the case even if the client got the IR35 status decision wrong.

Monday 29th Jan 2024
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Written by Rebecca Seeley Harris

Rebecca is a leading expert in employment status, IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44 and any issues affecting the self-employed and personal service companies.
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