What is ‘Reasonable Care’?
Following HMRC’s draft legislation published on 11th July 2019, it has been established that, as of April 2020, under the new IR35 in the Private Sector legislation, End-Hirers will have an obligation to exercise reasonable care when assessing the IR35 status of their off-payroll workforce.
Where incorrect status determinations have been achieved in the absence of reasonable care, this leaves End-Hirers at risk of HMRC imposing severe penalties which will consist of the unpaid taxes, interest and penalties. This could mean that, along with any outstanding tax liabilities, End-Hirers could be liable to pay hefty fines for failing to demonstrate reasonable care.
Defining Reasonable Care
Despite the fact that End-Hirers will be required to demonstrate reasonable care in assessing status, when the Public Sector IR35 Off-Payroll Working Rules are extended to the Private Sector, the actual requirements for demonstrating reasonable care are yet to be confirmed and it is presumed that no set definition will be provided. However, it is clear that End-Hirers will have to demonstrate that they have taken active steps to prepare for and comply with the new legislation. There are a number of options available to End-Hirers in relation to satisfying the reasonable care requirement:
- Check Employment Status for Tax (CEST) tool – HMRC’s tool has been widely criticised and could be described as not being fit for purpose. HMRC themselves recently refused to stand by a determination reached by CEST, in RALC Consulting Ltd case therefore we do not believe that using CEST would equate to reasonable care. Furthermore, End-Hirers have an obligation to provide supporting information behind the status reached and CEST is currently unable to provide this.
- Internal Assessments – End-Hirers may choose to carry out IR35 assessments of their off-payroll workforce internally, considering both contracts and working practices. This can be a time-consuming process and issues may arise whereby the End-Hirers staff do not have the skills, expertise or experience to deal with all of the new obligations that are being imposed. IR35 is complex legislation and few End-Hirers will have the required in-house expertise to carry out effective internal assessments.
- External Assessments – Engaging with external IR35 experts to assess your off-payroll workforce is the most advisable approach in order to ensure that the reasonable care requirement has been met. Both contracts and working practices will be thoroughly reviewed by independent experts who can provide you in-depth detail and advice and also be on hand to support you throughout the whole change process.
HMRC have been abundantly clear – blanket assessments will not constitute reasonable care. Therefore, it is crucial that End-Hirers use the time leading up to April 2020 to ensure they have a robust process and systems in place for assessing their off-payroll workers, in a manner which constitutes reasonable care.
The draft legislation of 11th July 2019 confirmed that End-Hirers will be required to issue their off-payroll workers with written status determination statements, and an effective challenge process must be implemented. Therefore, if a contractor disagreed with the status determination issued to them, they would be able to challenge this, and the End-Hirer would then be obliged to provide further reasons for either changing their determination or standing by the original status determination.
It is therefore highly unlikely that End-Hirers will be able to avoid complying with their obligations through implementing blanket assessments.
Brookson Legal Services
Brookson Legal Services are already in the process of carrying out IR35 audits for numerous end clients and agencies. We have been advising on IR35 since its inception in 2000, and members of our team have sat on HMRC’s IR35 forum as technical experts in the field. We can assess your off-payroll workforce and assist you in implementing an effective challenge process in accordance with the draft legislation.
Engaging with an independent expert, such as Brookson Legal Services, is highly likely to satisfy HMRC’s reasonable care requirement.