Now that IR35 in the Private Sector has been confirmed, End-Hirers must switch their focus to ensuring compliance with the new rules and getting comfortable with the requirement to demonstrate Reasonable Care. Whilst End-Hirers have an obligation to exercise reasonable care when assessing the IR35 status of their off-payroll workforce this requirement does not start and end in April 2021, but will continue indefinitely.
Many End-Hirers have already been through an IR35 Audit process and issued Status Determination Statements to contractors in the run up to the April 2020 roll out date, but this does not mean no further action is required. End-Hirers must test the information initially obtained and address any changes to contracts and working practices.
Although it is still in draft, HMRC’s internal Employment Status Manual (ESM10014) categorically states that End-Hirers must check existing individual determinations to ensure they remain valid and accurate and if changes are identified, a new Status Determination Statement must be issued.
Where End-Hirers don’t continually consider IR35 Status or if incorrect status determinations have been reached in the absence of reasonable care, this leaves them at risk of HMRC imposing severe penalties which will consist of the unpaid taxes, interest and penalties. This means 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
HMRC define the Reasonable Care as acting in a way that would be expected of a prudent and reasonable person in the End-Hirer’s position. HMRC recognises that the circumstances of End-Hirer’s will vary greatly, depending on their abilities, experience and circumstances. That means that the bar for larger multi-national companies in getting over the Reasonable Care hurdle, is much higher than it is for smaller companies.
The options open to End-Hirers in demonstrating Reasonable Care when undertaking IR35 Assessments, are:
- Check Employment Status for Tax (CEST) tool – HMRC’s tool has been widely criticised and has been described as not fit for purpose. HMRC themselves have refused to stand by a determination reached by CEST in the RALC Consulting Ltd case therefore it is difficult to get comfortable with CEST being the answer to your IR35 needs.
- Use another ‘IR35 Tool’ – Many of the ‘Tool’s out there in the market at the moment are automated and produce an outcome after a system has calculated all responses. Therefore, End-Hirers must ask themselves, how accurate can a system be when it comes down to complex tax and employment law, which hasn’t considered their individual circumstances. There is obviously a huge question mark as to whether this approach would constitute Reasonable Care.
- 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 exercise and issues may arise whereby the staff do not have the skills, expertise or experience to deal with all of the new obligations that are being imposed. IR35 is complex tax legislation and few End-Hirers will have the required in-house expertise to carry out effective internal assessments. Should an End-Hirer take this approach our recommendation would be to ensure they have in-depth knowledge of IR35 and use resource that is solely focused on IR35 compliance.
- 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 with in-depth detail and advice and also be on hand to support you throughout the whole change process. External IR35 experts are also better placed to carry out refresher reviews and identify changes to working practices which may otherwise go unnoticed. HMRC’s guidance is very clear in that “Seeking the advice of a qualified, professional advisor” demonstrates that you have taken reasonable care. Do be careful however to ensure that whoever you choose to provide you with advice is suitably qualified to advise in the areas of IR35 and employment status and holds appropriate membership of a relevant professional body.
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 2021 to ensure they have a robust process and systems in place for assessing their off-payroll workers, in a manner which constitutes reasonable care.
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 provided 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.
Avoid the temptation to blanket all contracts as being inside of IR35. Taking this approach will mean that you have failed to take reasonable care and therefore become responsible for deducting PAYE.