IR35 off-payroll – what constitutes ‘reasonable care’?

When end-clients determine the IR35 status of contractors in the private sector from April 2021 onwards, they are tasked with taking ‘reasonable care’ when making employment status decisions.

Unfortunately, the term has no strict definition when it comes to IR35, and many in the contracting industry are concerned that some clients may decide to issue so-called blanket determinations – whereby an entire contractor workforce is deemed to fall within IR35. A practice which has been widespread following the public sector off-payroll rollout in April 2017.

We asked Seb Maley, CEO of Qdos Contractor what problems have been caused by the ambiguity of the term.

Please note that the private sector reforms were deferred from April 2020 to April 2021 following the Coronavirus outbreak.

What is meant by ‘reasonable care’ when referring to the off-payroll rules?

The IR35 legislation states the need for end-clients to take ‘reasonable care’ when assessing the status of contractors. While on the face of it, the term ‘reasonable care’ is fairly self-explanatory, issues have arisen given it is open to interpretation.

HMRC, for example, insists that role-based assessments, where one status is applied to numerous workers with the same contractual conditions, demonstrate ‘reasonable care.’ Qdos, however, along with the majority of IR35 specialists, disagree.

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’, or is it subjective?

Not when it comes to the IR35 legislation. This is ultimately the root of the problem and the reason why there is 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 themselves stating that blanket assessments are not compliant, the tax office has done very little – if anything – to stop them being made in the public sector. It’s widely acknowledged that The NHS, among other public sector bodies, took this approach when managing IR35 reform.

In the draft legislation for private sector reform, HMRC included details of 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 will be classed the fee-payer and therefore liable for IR35. This is perhaps HMRC’s attempt to provide greater clarity regarding status decisions and stopping blanket assessments.

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.’

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