What it means to take reasonable care in your decision making

HMRC’s 12-month ‘soft landing’ approach to IR35 penalties after the introduction of the off-payroll working rules ended in April 2022, meaning that end clients and agencies can face financial consequences of non-compliance with the legislation. 

However in a draft IR35 compliance check opening letter published by the ICAEW on their website, HMRC were already referencing potential penalties if they “have concerns about the way you apply the rules” when they started their compliance checks in the September of 2021.

Therefore, it is incredibly important that clients understand what taking reasonable care means when making IR35 determinations. If, as a decision maker, you fail to so, any unpaid tax, NICs, interest and penalties will rest with you. 

What is ‘reasonable care’? 

HMRC’s guidance at ESM10014 states that: “Reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position”

This definition is left purposely vague as: “…what is necessary for each client to discharge that responsibility must be viewed in the light of their abilities, experience and circumstances.”

Nevertheless, the absolute bare minimum that will be expected of every client engaging with the legislation is:

• review of the contractual documentation, 
• review of the working practices, and 
• producing a Status Determination Statement document

We strongly recommend to accountants that contracts are reviewed by an independent professional. Not only is this another step in demonstrating reasonable care, but it is not uncommon to see contract wording unintentionally implying the opposite of what was meant. This is where a tax specialist can guide you to drafting the most appropriate contractual terms. 

The contracts (and any other policies the worker is subject to) must align across the entire contractual chain and reflect the reality of the arrangements. Basing your determination on incorrect or imprecise contracts can land you in penalty territory.  

This includes creating a new SDS if there are significant changes to the worker’s engagement, or if the same worker is engaged to provide different services. 

It is also important to keep a smooth audit trail, as keeping accurate and up-to-date records is a legal requirement, and will make any potential enquiry much easier to defend. 

If you decide to outsource the SDS process to another party, you must remember that as the end client, you remain responsible for the validity of the SDS. To this end, we recommend that you engage with a reputable and experienced provider. 

Similarly, all in-house individuals involved in the decision-making process must be familiar with the working practices and preferably have a good understanding of status.

Is CEST reasonable care?

HMRC’s online tool has been the first port of call for many who are responsible for IR35 determinations. CEST is free and created by HMRC – which gives it a layer of credibility. Though it should come with a warning label:

1. CEST is known for producing ‘undetermined’ results in as many as four cases out of five, which is unacceptable for end clients who must make a determination for all engagements. You cannot use a ‘borderline’ determination on an SDS as it would raise a red flag to HMRC. 
2. The tool fails to consider one of the key status factors: mutuality of obligations (MOO). HMRC’s view on MOO is that if both parties have contracted and payment has been made in return for services, MOO must be present. Case law has determined that MOO is much more than just remuneration for services. 
3. CEST does not review the contracts. An SDS has to take contractual terms into consideration, which means that CEST is not a holistic solution.  

If you nevertheless choose to use CEST, it is crucial that all information input is accurate and all HMRC CEST guidance is followed. 

Comfort: blanket approach

While using a blanket method might seem like the path of least resistance, would not qualify as taking reasonable care.

IR35 has to be established on a case-by-case basis. Each engagement must be considered on its own merits, and unless you can prove that all workers are engaged under the same arrangements and you have taken time to verify this, a blanket approach will fail the ‘reasonable care’ test. 

Conclusion

Taking reasonable care is more than applying a bullet point list. It involves a review of both contractual terms and the working practices for each and every engagement. 

HMRC’s guidance may be a good place to start to familiarise yourself with your obligations, but HMRC’s take on status is not always definitive. The right contract wording and robust processes for analysing the working practices are the only sure way to guarantee that you have taken reasonable care.