HMRC publishes draft guidance on ‘reasonable care’

End clients must take 'reasonable care' to ensure that IR35 is administered accurately

In preparation for the introduction of private sector IR35 reform on 6th April, the Government has updated its draft guidance around ‘reasonable care’, which must be taken when determining the tax status of contractors. 

After receiving criticism from IR35 experts that ‘reasonable care’ is open to interpretation, HMRC has published a draft document in its Employment Status manual which outlines the basic principles of the term.  If a company fails to take ‘reasonable care’ when administering IR35 status, it will be transferred the IR35 liability irrespective of whether it is the fee-paying party in the supply chain or not.  It is therefore vital that medium and large businesses understand what is required of them when deciding if a contractor belongs inside or outside the scope of the IR35 legislation.

 

What does HMRC expect of companies?

It is expected that a contractor’s IR35 status is determined in light of the company’s “abilities, experience and circumstances”. Expanding on this, HMRC said it expects a “higher degree of care to be taken be taken by a large multi-national company with its own internal finance function than of a much smaller entity”.  Nonetheless, the tax office still expects a company to assess IR35 accurately and keep a record of how this determination was reached. In the eyes of HMRC, should a company lack the knowledge and understanding of IR35 to assess status with ‘reasonable care’, the engager is advised to “take care to find out about the correct tax treatment or to seek appropriate advice”.

 

Under this draft guidance, what constitutes ‘reasonable care’?

‘Accurately applying and keeping a record of the employment status principles (ESM0500).’

This suggests that private sector firms need to keep information that helped them reach an IR35 decision. While a Status Determination Statement (SDS) must be shared with each party in the supply chain to explain the reasons for a particular status determination, the above extract from the guidance relates to ‘information created, received and maintained as evidence and information by an organisation.’

‘Accurately completing HMRC’s Check Employment Status for Tax (CEST) tool.’

Despite HMRC’s IR35 tool, CEST, having obvious flaws, relying on it to assess IR35 qualifies as ‘reasonable care’. However, given the tool ignores key aspects of the legislation and its answers have been dismissed in court, we advise businesses to consider independent IR35 status reviews instead. It’s also important to note that the use of CEST is not mandatory. 

‘Applying HMRC guidance on determining status.’

The HMRC guidance includes the requirement for businesses to ‘fact find’ when considering the key IR35 status tests, which are Control, Personal Service and Mutuality of Obligation. When deciding a contractor’s IR35 status, engagers are expected to stand back and focus on the whole picture before making the decision of whether a contractor is genuine or a disguised employee.

‘Seeking the advice of a qualified, professional advisor.’

If, for example, a business lacks the understanding of the IR35 legislation, ‘reasonable care’ will be met if the company engages the help of an IR35 expert to help assess status, such as Qdos.

‘Having someone with a good understanding of the work to be undertaken involved in the determination process.’

While the term ‘good understanding’ is fairly ambiguous, in our expert view this means businesses shouldn’t hand the IR35 responsibility to a person without a strong grasp of the legislation. 

‘Checking existing individual determinations to ensure they remain valid/accurate.’

HMRC has reiterated the importance of assessing currently engaged contractors. This is vital in ensuring ‘reasonable care’, but also because from the 6th April the liability will transfer from the contractor to the fee-paying party.

‘Reviewing the processes being applied and amending for future determinations where necessary.’

Businesses are expected to continually improve how they assess IR35 status based on experiences. 

‘If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.’

While the written contract is important in determining status initially, HMRC will often scrutinise the working practices in an IR35 investigation. This is because they tend to reflect the reality of the engagement. Businesses are therefore advised to conduct a review of the contractor’s working practices to ensure IR35 compliance and meet ‘reasonable care.’

‘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.’

Even if a business was, for example, to engage Qdos to conduct IR35 contract reviews, it remains the responsibility of the end-client to ensure that IR35 is administered accurately.

With the final legislation for IR35 reform expected to be unveiled in the Finance Bill on 11th March, private sector businesses will not need to wait long to find out if this draft guidance around ‘reasonable care’ is introduced into the reform rolled out on 6th April. 

Qdos specialises in IR35 compliance. We conduct, on average, over 2000 IR35 status reviews every month and have handled more than 1,600 IR35 enquiries. We are currently working with over 200 agencies and end-clients, helping them manage changes to the IR35 legislation.