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The Government publishes draft regulations and IR35 guidance: with significant emphasis on “Reasonable Care”

  • United Kingdom
  • Employment law


Since the Government indicated at the end of last year that it was still “full steam ahead” for the introduction of the new off-payroll (IR35) working rules from April 2020, secondary legislation (enabling the recovery of NICs and amending the PAYE regulations to, amongst other things, allow for the recovery of unpaid taxes from other parties in the supply chain) as well as HMRC guidance have been keenly awaited.

Further reviews of the IR35 rule changes are being undertaken but the signs from Government are that its focus is to facilitate a smooth introduction of the rules, not to accommodate wholesale changes or a delay. Those who will fall in scope of the new IR35 rules should therefore continue to prepare. Click for information about support Eversheds Sutherland can offer regarding IR35.

The Government has now published, for consultation, draft regulations to enable the recovery of NICs where the new IR35 rules (currently set out in draft legislation which was issued in July 2019) apply and setting out how HMRC will recover unpaid employment taxes from other parties in the supply chain.

HMRC has also now published, in draft, a series of additions to its Employment Status Manual, confirming the mechanics of operation of the new IR35 rules but also providing important clarifications. (For our explanation of how the IR35 rules will apply in practice, see our previous briefing).

From this draft IR35 guidance, two aspects are of particular note:

  • the new IR35 rules will apply to payments made on or after 6 April 2020 only where the services were also provided on or after 6 April 2020; and
  • how HMRC views “reasonable care” by the parties involved.

“Reasonable Care”

There is significant emphasis upon “reasonable care” in the draft IR35 guidance. Taking reasonable care is clearly vital to a client and to their obligation to make a determination as to whether the worker would be their employee if they contracted directly with the individual worker. After all, if the client fails to exercise reasonable care when discharging this responsibility, the deduction of tax, NICs and apprenticeship levy and paying these to HMRC will rest with them (instead of the fee payer where the client does not contract directly with the worker’s intermediary).

However, the draft IR35 guidance also makes considerable reference to wider responsibilities of care under the IR35 rules; in terms of honesty by the workers themselves but also by any other parties in a chain.

By the client

The draft IR35 guidance now elaborates upon the meaning of “reasonable care”, stating, “Reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position.”

Whether this standard has been met in any particular case will be viewed by HMRC according to the client’s abilities, experience and circumstances. For example, a higher degree of care will be expected of a large multi-national company with a large internal finance function, in terms of the degree of enquiry and record retention involved to support how the decision was reached, than of a much smaller entity, with less resource.

Examples of reasonable care 1:

  • accurately applying and keeping a record of the employment status principles
  • accurately completing HMRC’s Check Employment Status for Tax (CEST) tool
  • applying HMRC guidance on determining status
  • seeking the advice of a qualified, professional advisor
  • having someone with a good understanding of the work to be undertaken involved in the determination process
  • checking existing individual determinations to ensure they remain valid / accurate
  • reviewing the processes being applied and amending for future determinations where necessary
  • if there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination
  • ensuring they check and review processes of other parties where they subcontract the determination process to another party

Examples of insufficient care:

  • determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case
  • determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker
  • failing to reconsider determinations where there has been a material change in circumstances
  • an absence of any proper support or training within the organisation to enable those individuals responsible for making determinations to properly consider the off-payroll working rules
  • inputting inaccurate information into CEST
  • failing to take into account all relevant evidence
  • the person tasked with completing the status determination statement does not possess the knowledge required to complete it and is not provided with the required level of support
  • the client subcontracts the status determination process to another party and does not confirm the accuracy of that conclusion and the reasons for it
  • this final indicator by HMRC of potentially insufficient care could prove significant for many clients who, on outsourcing the status determination process, will not have anticipated a need to double-check the process or determination themselves.

Quality training will therefore be an essential aspect of demonstrating reasonable care for employers, not just for their in-house status determination process but externally. Compliance is not something that can be delegated.

The draft guidance also makes clear that advertising a role as inside or outside the rules may add clarity to workers, but it is not, on its own, sufficient to be a valid status determination.

In practice, HMRC accepts that it will be sensible, as well as desirable, for clients to group certain workers together in conducting a status determination exercise. However, this will only be acceptable for workers who are engaged under (and in reality work under) the same contractual terms and conditions. In any event, each individual (as well as the relevant third party the client contracts with) must receive a status determination statement.

By the Worker

Despite the degree of onus which lies upon the client to take reasonable care in its enquiries, a key source of information will be the workers themselves.

The draft guidance clarifies that the worker must inform the deemed employer whether or not their intermediary is within the scope of the IR35 rules. If they don’t, the legislation assumes that the intermediary they work through is subject to IR35, which could result in tax deductions being made even though the worker’s intermediary is not in scope of the IR35 rules. Furthermore, where the worker provides fraudulent information they will be liable for both employee and employer deductions and it is the worker which HMRC will pursue.

By all parties in the Chain

As alluded to above, it is not only the client that attracts the focus of the draft IR35 guidance in terms of reasonable care. HMRC expects the client and/or the agency it contracts with to check carefully whom they are dealing with to establish the credibility and legitimacy of their supply chain, considering, for example: what is the agency/labour supplier’s history in the trade? Is the agreed contract price for the supply of labour lower than market value without a clear explanation for why? Have normal commercial practices been adopted in negotiating prices? Have they been asked to make payments to third parties other than the party the client is contracting with or asked to make payments to an offshore bank account? If so, is there a valid reason for that? Is a newly established agency with minimal trading history offering to supply labour cheaper than a long-established agency? Is this the same agency/labour supplier as previous, but operating under a different name? If so, why? Is the party insisting that they can further subcontract the labour supply? If so, why?

Other points of note in the draft IR35 guidance:

  • Payments straddling 6 April: If a payment is made for services which were provided both before and after 6 April 2020, then HMRC requires a “just and reasonable apportionment” to be made (i.e. to identify the part of the payment which can be reasonably seen to be for services provided on or after 6 April 2020)
  • Contracting out of services: The guidance confirms that organisations receiving a fully contracted out service do not need to apply the IR35 rules. However, it warns organisations to exercise care, e.g. to ensure that a labour supply contract has not simply been re-labelled as a contracted out service and that a ‘statement of work’ will not prevent IR35 from applying. Those concerned to understand more should read the four examples given by HMRC
  • Overseas parties: the guidance indicates that, even where the client is based overseas, if a UK liability arises (which will be the case if the worker is UK tax resident or performs the services in the UK) then the client will still be responsible for applying the new IR35 rules and will need to carry out a status determination and pass this to the worker and the party it contracts with for the supply of the worker;
  • Client and agency liabilities: As stated above the Government has recently published, for consultation, draft regulations which set out how HMRC will seek to recover employment taxes from the client or the agency it contracts with, when it is unable to recover taxes from the deemed employer/fee payer. The regulations make clear that this will be when HMRC considers that there is no ‘realistic prospect’ of recovery in a ‘reasonable period’ of time. The guidance provides more clarity as to when HMRC will use these powers. For example, where: a promoter of tax avoidance has entered into the labour supply chain; the client or first agency requires workers to provide their services by contracting through a particular party that is likely to have been chosen due to its non-compliance with the off-payroll working rules; a fee-payer/deemed employer liquidates to avoid the IR35 employment taxes; a client or first agency knew, should have known or had reasonable grounds to suspect that the labour being supplied to them was supplied through a party or parties in the labour supply chain that did not comply, or had no intention of complying with the rules. The guidance also makes it clear that HMRC does not intend to use these powers of recovery where the fee payer/deemed employer has not paid the employment taxes as a result of genuine business failure (i.e. insolvency).

1 The HMRC examples of behaviours that would indicate a client has or has not taken reasonable care are illustrative and not exclusive.