IR35 and reasonable care??

Those familar with the IR35 changes expected to apply from April 2020 will know that THE key requirement for end users of contractors operating through their own limited company is to ensure that they determine the employment status of the contract having taken REASONABLE CARE. It is therefore crucial for businesses to ensure that they have met this hurdle or they could be faced with signficant tax bills or a backlash from contractors. Unfortunately HMRC have not yet published any guidance on what they view as reasonable care in the context of IR35. I would expect this to be published prior to April 2020 but we do not yet know precisely when.

HMRC have issued guidance on their view of reasonable care in the contect of considering penalties for incorrect tax assessments. This guidance essentially defines reasonable care as meaning that a business should act in a way expected of a prudent and reasonable person in the position of that business. HMRC expect a greater degree of care to be taken over complex and new legislation as opposed to simple and straighforward obligations. In my view the changes to IR35 fall into the former category. You would therefore expect the threshold for reasonable care to be quite high. HMRC would reasonably expect a business facing new tax rules to find out about the correct treatment and where this knowledge is not possessed in house, seek appropriate advice from a specialist.

So, what does this mean practically? My thoughts on this are that a "prudent and reasonable" business should be doing the following:

• Ensuring that an accurate employment stauts check, considering all the relevant factors as defined by employment case law has been undertaken and documented (HMRC would expect to be able to audit the evidence behind the decision).
• Seeking the advice of a suitably qualified and experienced specialist to help apply the rules correctly. An external adviser should work directly with the people within the organisation who know how the contractors work and are managed.
• Don't assume that an online tool / suvery monkey approach to determining status will be sufficient. Whoever within the business completes any online questionnaires should have both an in-depth knowledge of the working practises and a good knowledge of employment case law to ensure that the questions are understood and answered correctly. The outputs of any automated test should also be validated by a suitably qualified and experienced specialist.
• Regularly checking that both the approach being taken by the business is still fit for purpose and that any ongoing contracts / working practises have not have not changed since the original assessment was undertaken. This audit should be documented and retained as HMRC would expect to see / review this.
• Ensuring the client led appeals process is properly resourced by specialists who will be able to use any further information provided by the contractor or fee payer to reconsider any status determination which is subject to challenge.
• If the assessments have been outsourced to a third party the organisation should still check / review and sign off the outputs.

Orgnaisations taking the steps above are likly to be in a good place should HMRC choose to audit them in the future. Given HMRC's resource constraints I envisage HMRC policing these new rules at the end client level and focussing their time on assessing whether reasonable care has been taken or not. If it can be demonstrated that it has then that should be the end of the matter. If however it can't be demonstrated then HMRC are likely to delve further and audit a sample of contracts; this is not a great place to be given the subjectivity of employment status.

Remember, it's not just tax that poses a risk here. There are also commercial and competitor threats associated with the attraction and retention of contractors and financial implications asscoiated with those found to be inside of the rules. Following the steps above will not only mitigate the tax risk but will also ensure that businesses can continue to engage and use the skills of genuinely self-employed contractors without having to increase rates or run the risk of them finding contracts elsewhere.