Taking reasonable care under IR35/off-payroll means following an informed, evidenced and ongoing process when you decide a contractor's status. HMRC considers how you reached the decision, and a robust process avoids careless penalties if the status answer was wrong. Being “careless” means you failed to take reasonable care.
If HMRC finds you careless, you can face penalties of up to 30% on top of the full tax bill and a six-year lookback window instead of four.
Taking reasonable care matters most for businesses that engage contractors through their own limited companies, because the off-payroll rules put the status decision, and the duty to take care over it, on the client.
What does "reasonable care" mean under IR35?
Reasonable care under IR35 means doing what a prudent, sensible business in your position would do when making a status decision. HMRC looks at your process: whether you took the rules seriously, used competent advisers, recorded your reasoning and kept the decision under review. It does not expect you to be a tax expert.
The standard depends on who you are. A business that engages contractors is expected to know the off-payroll rules exist and apply them. A contractor working through their own limited company is expected to know about IR35. Neither is expected to work out complex case law alone, but both should seek help when the challenge goes beyond what they know.
What happens if HMRC decides you were careless?
If HMRC decides you were careless, you pay the underpaid tax plus a penalty of 15% to 30% on the full tax bill (before offsets are considered), and HMRC can go back six years instead of the usual four for income tax. A careless finding can more than double the cost of a wrong IR35 decision.
| How HMRC sees your behaviour | How far back HMRC can go | Penalty on the lost |
| Reasonable care taken | 4 years | None |
| Careless | 6 years | 15% to 30% |
| Deliberate, not concealed | 20 years | 20% to 70% |
| Deliberate and concealed | 20 years | 30% to 100% |
Who has to take reasonable care: the client or the contractor?
Under the off-payroll rules, the client should take reasonable care when it makes status decisions. The client decides the contractor's status and records it in a Status Determination Statement (SDS), which is your written status decision with your reasons. Where the client is small, the duty sits with the contractor's own company.
The law treats a statement as an SDS only if the client took reasonable care in reaching the conclusion it contains. Without that care, the statement fails, and the client stays liable for the PAYE and National Insurance on the contractor's fees. Once a client has made a decision with care and passed the SDS to both the contractor and the next party in the supply chain, usually the agency, tax liability passes away from the client and down the chain.
Is a wrong IR35 decision automatically careless?
No. A wrong IR35 decision reached through a reasonable, well-evidenced process is not always careless. The law accepts that a business can take proper care and still reach an answer HMRC disagrees with. In that case you owe the tax, but you avoid the careless penalty and the extended six-year lookback.
Which IR35 approaches does HMRC treat as careless?
The approaches most likely to be treated as careless are ignoring IR35 altogether, ignoring advice to get specialist help, and relying on sources that lack the competence to give advice. The strongest position is using an expert-built tool backed by specialist IR35 advisers who have experience of HMRC compliance checks and successfully defending at a tax tribunal.
Each row below assumes the engagement turns out to be inside IR35. If it is outside, no tax is lost, and carelessness never comes up.
| What the business or contractor does | Likely to be careless? | Why |
| Doesn't consider IR35 at all | Almost certainly | Businesses are expected to know the rules apply. Doing nothing is the clearest failure. |
| Is told to get specialist advice and doesn't | Almost certainly | Ignoring a professional warning is the classic example of not taking care. |
| Decides alone, with no advice and nothing written down | Probably | There's no record of any thought or help behind the decision. |
| Accountant says they can't help, so does it themselves | Probably | The adviser stepping back signals a specialist question. A sensible business would find someone who can help. |
| Uses an online tool not built or backed by tax experts | Probably | Relying on a source only counts as care if that source is competent. |
| Writes its own analysis that doesn't follow case law | Probably | A thin argument such as "we have a substitution clause" shows effort, but also shows the author needed advice. |
| Uses HMRC's CEST tool | Possibly | Public bodies that used CEST have been found careless and penalised. |
| Uses expert-built tools and services such as IR35 Shield | No | This is closest to relying on a competent adviser. |
Does using HMRC's CEST tool count as reasonable care?
Not reliably. CEST (Check Employment Status for Tax) is HMRC's free online status tool. It is optional, it has no legal authority, and a CEST result on its own is not a Status Determination Statement because it doesn't consider the contract or give your reasons. Public bodies that used it have still been found careless.
HMRC says it will stand by CEST results, but only where the information entered is accurate and aligns with HMRC's own guidance. That guidance is HMRC's opinion of the law, not the law. HMRC's own counsel has told a tribunal that CEST is irrelevant to deciding status, so you cannot assume HMRC will stand behind a result if it is challenged.
The track record is poor. Twelve public bodies that used CEST have received more than £525m in off-payroll tax bills, and several, including the Ministry of Justice and the Home Office, were also penalised for carelessness. CEST's logic hasn't changed since November 2019, even though the Court of Appeal and Supreme Court have since settled how status should be judged, and it gives no answer in around one case in five.
Can you rely on an IR35 adviser or software to show reasonable care?
Yes, as long as the adviser or software is competent for IR35 specifically. HMRC's own guidance, which follows case law, describes reasonable care in exactly these terms. Anonymous or unqualified sources fail the first test.
Signs of a competent IR35 adviser:
- Specialist IR35 knowledge. They know the legislation and the case law.
- A proven track record. Look for experience handling HMRC status enquiries and representing businesses at tax tribunals.
- A clear, reasoned conclusion. They give an answer you can act on and are open about any real risks.
- Proper terms and insurance. They set out the work in signed terms of engagement and hold professional indemnity insurance, so you have a remedy if the advice is negligent.
Our guide How to Choose a Competent IR35 Adviser goes into this in more detail.
What this means for your business
You can show HMRC you took reasonable care if your IR35 process is informed, evidenced and kept up to date. In practice, that means five things.
- Assess every engagement. Ignoring IR35 is the quickest route to a careless finding and six years of exposure.
- Use a competent specialist. Pick an adviser or tool with proven IR35 expertise, ideally one that has defended status enquiries at tribunal. Avoid anonymous advice.
- Keep the evidence. Save the information behind each decision, your SDS and the emails around it, so you can show your working later.
- Act on warnings. If an accountant or tool flags doubt, get specialist advice. Ignoring that advice is close to automatic carelessness.
- Review regularly. Reassess when a role changes.
Frequently asked questions
Do we have to use CEST to decide IR35 status?
No. There is no legal requirement to use HMRC's CEST tool, and HMRC's own manual says it isn't compulsory. You can reach a status decision another way, as long as it is based on legislation and case law and made with reasonable care.
What records should we keep to prove reasonable care?
Keep everything that shows how you reached each status decision: the information and answers used in the assessment, the SDS and its reasons, any advice you received, and the emails around it. Add a record of each review. If HMRC challenges a decision years later, this evidence shows your process was sound.
How often should we review a contractor's IR35 status?
Review a contractor's IR35 status whenever the contract changes, and check periodically during long engagements that day-to-day practice still matches your decision. A determination made once at the start and never revisited is weaker evidence of reasonable care than one you have kept up to date.
How IR35 Shield helps
IR35 Shield for Business gives you expert-built status assessments, a reasoned Status Determination Statement for every engagement, backed by specialists who have defended IR35 cases at tribunal.
If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
