When end-clients determine the IR35 status of contractors in the private sector, they are required to take ‘reasonable care’ when making employment status decisions.
In simple terms, ‘reasonable care’ means taking proper steps to arrive at an accurate IR35 decision.
This includes reviewing the actual working practices, considering the contract terms, and applying a fair, evidence-based assessment rather than relying on assumptions or broad policies.
“Reasonable care” is one of the most important concepts in the off-payroll IR35 rules, because it determines which party carries the tax risk when status decisions are wrong.
In the private sector, the responsibility for taking reasonable care lies with the end client, not the contractor or the agency.
“Reasonable care” is what protects clients from getting IR35 decisions wrong. It requires individual, evidence-based assessments. Where clients rely on blanket decisions or weak processes, the risk of incorrect IR35 outcomes and potential tax liability increases significantly.
The requirement to take reasonable care is set out in HMRC’s off-payroll working rules, with further guidance available in the Employment Status Manual.
Why reasonable care matters under the off-payroll rules
Under the off-payroll rules, the party responsible for determining IR35 status also carries the risk if that decision is wrong. Taking reasonable care is therefore not just a procedural requirement, but a key part of managing IR35 compliance.
Where reasonable care is not taken, liability for PAYE and National Insurance can remain with the end-client. This is one of the main reasons many organisations have taken a cautious approach to IR35 since 2021.
Using tools such as HMRC’s CEST can form part of a reasonable care process, but only where the inputs accurately reflect the actual working practices.
If you’re investigated, HMRC will look closely at whether reasonable care was taken as part of the IR35 enquiry process.
We asked Seb Maley, CEO of Qdos Contractor, what problems have been caused by the ambiguity of the term.
What is meant by ‘reasonable care’ under the off-payroll rules?
The IR35 legislation requires end-clients to take ‘reasonable care’ when assessing the status of contractors. While the term sounds straightforward, issues arise because it is open to interpretation.
HMRC has indicated that role-based assessments can form part of a compliant process in some cases, but only where they properly reflect the actual working practices of each engagement. Qdos, however, like most IR35 specialists, disagrees.
To show ‘reasonable care’ and therefore make well-informed IR35 decisions, we believe assessments should be made on a case-by-case basis.
Is there a statutory definition of ‘reasonable care’?
Not when it comes to the IR35 legislation. This is ultimately the root of the problem and the reason for the confusion surrounding it.
Many experts are stressing to HMRC that in order to stamp out blanket assessments – where contractors are typically placed inside IR35 without any consideration of the details of their engagement – the term ‘reasonable care’ must be clearly defined.
How about blanket assessments? Doesn’t this practice demonstrate a lack of reasonable care?
Absolutely. Blanket assessments result in contractors being deemed employees for tax purposes automatically.
And despite HMRC stating that blanket assessments are not compliant, the tax office has done very little, if anything, to stop them being made in practice.
It’s widely acknowledged that the NHS, among other public sector bodies, took this approach when managing IR35 reform.
In the final off-payroll legislation, HMRC introduced the requirement for a status determination statement, in which the end-client must provide the reasons behind a particular IR35 decision. Until this is shared with contractors and agencies, the end-client is treated as the fee-payer and therefore liable for IR35.
In practice, the SDS is one of the main ways clients demonstrate that they have taken reasonable care, as it forces them to explain and stand behind their decision. An incomplete or generic SDS can be challenged by the contractor, and may indicate that reasonable care has not been properly applied.
What should parties in the contractual chain do to demonstrate that they have taken reasonable care?
Given there is no clear definition of ‘reasonable care’, as already mentioned, it is very much open to interpretation.
However, it is our view that in order to demonstrate ‘reasonable care’ when setting IR35 status, each contractor must have their status set individually after a thorough review of the working practices.
In doing so, the party setting IR35 status will show ‘reasonable care.’ Failing to take reasonable care can mean the liability for tax and National Insurance remains with the client.
Worried about an IR35 challenge?
HMRC investigations can be expensive and time-consuming. Qdos provides expert defence and financial cover if your status is challenged.