The majority of IR35 status determinations we see made using HMRC’s Check Employment Status for Tax tool (CEST) would not demonstrate reasonable care. Here’s why:

• CEST is  extremely easy to get wrong – in a lot of cases it is completed without the user reading the vast amounts of accompanying guidance resulting in misinterpretation of the questions. 
• It is not aligned with up-to-date IR35 case law and omits to consider the key issue of mutuality of obligation. 
• The right of substitution question is too weighted and widely misunderstood.
• It does not produce a determination in all cases – approximately 20% of outputs are undetermined, leaving the user unsure of what to do next. 
• It does not allow for input from all relevant parties.
• HMRC stipulate that they will only stand by a result that is “wholly accurate”.

Don’t put your compliance at risk by relying on CEST – by leveraging our expertise and deep understanding of the legislation, we help you minimise the risk of misclassification, ensuring full compliance and demonstrating your commitment to taking reasonable care.

Reasonable care under the off-payroll working rules, or IR35, refers to the level of diligence and thoroughness businesses must exercise when determining the employment status of a worker. This is a critical aspect to ensure compliance with HMRC regulations and to avoid potential financial and legal repercussions.

Key components of Reasonable Care:

• Thorough Assessment with careful consideration for the contractual terms and actual working practices in each case, and not simply applying blanket determinations.
• Documenting the process, maintaining detailed records of the steps taken during the assessment and the rationale behind the IR35 status determination for each worker.
• Effective communication, ensuring the Status Determination Statement is passed to the worker and any other relevant parties, setting out the status decision and reasons behind it.
• Monitoring changing circumstances, and any situations arising which would warrant a re-assessments.
• Seeking advice from experts or specialists when necessary to ensure a comprehensive understanding of the rules.
• Staying updated with any changes in legislation or HMRC guidance to maintain compliance.

Repercussions of Not Taking Reasonable Care:

• Tax Liability: if HMRC determines that reasonable care was not exercised, your business could become liable for unpaid tax and National Insurance contributions (NICs).
• Penalties and Interest: HMRC may impose significant penalties for failing to take reasonable care, in addition to any backdated tax and NICs. Interest charges may also apply to late payments.
• Reputational Damage: Non-compliance with off-payroll working rules can damage your business’s reputation with clients, workers, and HMRC. This can negatively impact future business opportunities and relationships with contractors.

Our comprehensive and reliable IR35 status determination service, ensures that reasonable care is taken at every step to comply with HMRC regulations and safeguard your business from potential risks.

You can read more about what “reasonable care” means in our guide.

We have never needed to insure our work and it is not typical practice to insure against legislative compliance risks. If you take reasonable care in assessing your workers’ status, you can avoid most IR35 risks. Properly checking and documenting whether your contractors fall inside or outside IR35 and following HMRC guidelines will help keep your business compliant without needing insurance. Our IR35 Status Determination service helps you to demonstrate you have undertaken a robust and accurate assessment, so you can stay protected and save on unnecessary insurance costs.

An IR35 status determination statement (SDS) is a formal document which confirms the IR35 status of an engagement and needs to be provided to the worker and any other party you contract with above them no later than the date of the first payment.

The SDS should clearly outline the reasons for the determination and the evidence used to make the decision. It should include details about the working relationship, the nature of the services provided, and any relevant contract terms. The SDS must be communicated to the contractor and any other parties in the supply chain.

All assessments undertaken within our IR35 Status Determination Service come with a robust, comprehensive SDS.

IR35 status should be reviewed regularly, especially if there are changes in the working practices or contract terms. It is good practice to conduct a review at the start of each new contract and periodically throughout the engagement to ensure you are meeting your reasonable care requirements.                                   

While right to substitute is an important factor, IR35 status is never determined by one element alone. Courts and HMRC focus on the entire working relationship, considering factors like control, whether the contractor is genuinely “in business”, mutuality of obligation (MOO), and financial risk.

A substitution clause that exists only on paper, without being exercisable in practice, carries little weight in HMRC investigations or tribunals. 

Read our guide on the right of substitution to learn more.