Demonstrating IR35 Compliance and Reasonable Care

We often see organisations rush straight into performing bulk IR35 assessments to comply with the 2017 Public Sector and 2021 Private Sector IR35 legislation requirements, neglecting to establish ongoing processes for managing IR35 obligations. This approach can lead to repeated efforts every 6 or 12 months (or sometimes longer), starting from scratch each time to understand the status of each off-payroll worker.

What is Reasonable Care in IR35?

A more strategic approach involves setting up continuous processes and policies for managing IR35 status, thereby avoiding the need to repeatedly start from the beginning. The key aspect of the legislation is the need to evidence that ‘Reasonable Care’ has been taken. Demonstrating Reasonable Care will satisfy HMRC and prevent inquiries.

Firstly, organisations must identify the entire in-scope population of off-payroll workers, which includes not only the visible and known contractors but also a likely subsection of PSCs within procurement and other supplier channels.

Demonstrating Reasonable Care involves several key elements:

• Seeking professional advice.

  It might be tempting (and appear cost effective) to work your way through the requirements of the IR35 legislation in-house, but this inevitably leads to issues and processes implemented which are not completely robust. Obtaining the advice of an experienced team of IR35 professionals will ensure your IR35 obligations are met along with mitigating risk and removing an unwanted task away from your internal staff.

• Involving individuals with a thorough understanding of the work, in the determination process.

  Someone who is familiar with the day to day working practices of the Contractor must be involved in the IR35 assessment process. This typically involves the contractor manager or the person the contractor will provide progress updates to. It is also advisable that this person has knowledge of the IR35 legislation, so they understand the context and the implications of non-compliance. This means that determining IR35 status cannot be left to agency partners or siloed departments to complete in isolation.

• Ensuring determinations are accurate.

  It is imperative that IR35 determinations are accurate. Failure to do so is likely to be taken as a failure to demonstrate Reasonable Care, leading to a minimim 30% penalty on top of the tax liabilities. Organisations can quite easily get incorrect determinations using CEST as we have seen in the Public Sector.

• Considering adjustments to contracts and changes in working practices.

  As and when changes to contracts or working practices occur it should be considered as to whether a new IR35 assessment should be undertaken. Sometimes changes to working practices can go under the radar, this is why it is important to ensure reassessments are conducted periodically.

• Making new status determinations if there are changes to a worker’s contract or working practices.

  As and when changes to contracts and working practices are identified a new IR35 assessment should be conducted leading to a new SDS is produced, which represents an accurate reflection of the new contract and/or working practices.

Most organisations will require external advice and support to demonstrate Reasonable Care unless they have in-house knowledge and expertise on the intricacies of the IR35 legislation.

In order to be able to demonstrate that Reasonable Care has been met, organisations should consider the following: 

• Appointing a specialist service provider or upskilling internal staff on IR35 intricacies.

• Providing training and guidance to internal stakeholders and contractor managers.

• Identifying the entire in-scope PSC population, including those hidden via different channels.

• Keeping records of the number of engaged PSCs versus outsourced service providers and how they were distinguished.

• Assessing the working practices of each PSC, alongside the contract.

• Identifying and implementing ways to maintain and strengthen IR35 status.

• Issuing the Status Determination Statement (SDS) to Fee-Payers and PSCs.

• Setting a reassessment schedule based on the risk profile of the contractor/role: every 3 months for high-risk roles, 6 months for most contractors, and 12 months for those comfortably outside IR35 and removed from the organisation.

• Providing refresher training and onboarding new starters in compliance best practices.

Having someone to advise on IR35 status, best practices, and broader tasks and processes not only strengthens an organisation's position to evidence reasonable care but also helps mitigate risk. Providing additional support and training to internal staff managing contractors ensures best practices are applied, risks are mitigated, and IR35 status remains clear over time.

Investing time and effort initially pays off in the long run, allowing for effective management of legislative requirements. Treating IR35 as a one-off exercise often leads to sporadic bulk assessments, which are time-consuming and can reveal significant process flaws, attracting unwanted attention from HMRC.

If you and your team could benefit from a better understanding of Reasonable Care in IR35, get in touch with one of our experts today.