The Off-Payroll legislation places particular emphasis on ‘reasonable care’, which will then determine whether the client or agency is liable for any unpaid taxes in situations where HMRC succeed in challenging an “outside IR35” determination at a tax tribunal.
The fact that reasonable care has been taken needs to be demonstrated through the provision of a valid Status Determination Statement (“SDS”), which must also contain reasons for the determination, as per section 61NA(1)(a) of the legislation.
The requirement for a valid SDS is not met if the hiring firm fails to take ‘reasonable care’ in reaching its conclusion, in which case they assume the role of ‘fee-payer’, section 61NA(2), meaning if HMRC later investigates then the client will be liable for any unpaid taxes.
How likely is the risk for clients and agencies?
Agencies only become exposed to future tax risk if:
- The client has taken reasonable care and passed them a valid Status Determination Statement (see section 61N(5)) stating “outside IR35”
- HMRC opens an enquiry, concludes reasonable care was taken, but disagrees with the status outcome
- A tax tribunal agrees with HMRC, against the backdrop of all other parties and witnesses to the case providing evidence to the contrary.
Firstly, it’s worth noting that legally there is no obligation for the client to pass an outside SDS to the agency, and if the client doesn’t do so, it retains the tax risk.
Secondly, if the client has used a reputable compliance-led provider to assess and manage ongoing status then it’s highly unlikely the determination is wrong. HMRC’s motivation to try and overturn the status will be small – especially as there may be much easier pickings elsewhere in the market.
Thirdly, HMRC have lost the majority of IR35 cases in the last 20 years in a period when the supply chain has taken a lackadaisical approach to IR35. Given all parties in the supply chain are now tightening up contractual paperwork and practices, this makes HMRC’s challenge even harder.
Taking account of the above, HMRC’s chances of ascending this mount improbable are miniscule, and agencies should be careful not to succumb to firms selling wares based on unsubstantiated fear.
What is ‘reasonable care’?
Although there isn’t a legal definition of reasonable care within tax legislation, it is a well-established principle in case law, and an examination of past tribunal cases provide some clarity.
An example is found in the First-tier Tribunal in Anderson (deceased) (TC206), where the Judge argued: “The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.”
Reasonable care is based on the law of tort, and essentially means not being negligent when giving advice or choosing whom to take it from. Suffice to say, a knowledgeable person taking advice from a fool won’t have demonstrated reasonable care, and ignorance is not a reliable defence in tax tribunals. Taking advice from a firm with a proven reputation will satisfy reasonable care and also provides you with a legal backstop if they give poor advice.
HMRC has also published some useful guidance to help firms understand what is expected of them, which includes:
- Taking care to seek ‘appropriate advice’ to ensure correct tax treatment
- Conducting thorough status assessments and preserving detailed records
- Continuing to monitor the status of contractors throughout each engagement
This imposes a responsibility upon hiring firms to make informed decisions regarding compliance, which requires an understanding of the legislation. Our book, IR35 & Off-Payroll – explained details everything stakeholders need to know, with chapters dedicated to assisting hirers and agencies in overcoming their compliance challenges.
The HMRC guidance also outlines the characteristics that firms should look for in their chosen compliance service. In addition to facilitating detailed record keeping and ongoing monitoring, firms will need to demonstrate that they have taken appropriate and prudent advice. Consequently, firms that enlist pop-up IR35 experts with no prior demonstrable experience are more likely to fall short of satisfying the reasonable care requirement.
Example of reasonable care
Let’s suppose you are an aspiring James Bond, 007 secret agent, and are about to be sent on a secret mission, working with a team of international agents to infiltrate a secret lair and bring to justice Baron Samedi (he’s the baddie in “Live and Let Die”).
Timing is going to be essential, but Government cutbacks mean “Q’s” department (he’s the one who makes all the gadgets) is no longer available. And, we are in Covid-19 lockdown so all shops are shut, so instead you decide to go online to buy yourself a reliable timepiece, with an inbuilt circular saw (you need to see the movie to get this).
You ask two friends for advice on where to shop. Zaman says to use ProperWatches.co.uk and Horatius recommends CheapFakeWatches.com.
The mission is in full swing, but you get caught, and find yourself tied up hanging over a tank full of sharks. Time to active the watch saw. It fails (we go off-script), and whilst you escape the shark tank you sustain terrible injuries from shark bites and return home. You then decide to litigate for negligence due to the failing watch.
To establish where the negligence may sit, we need to know how much you, Zaman, Horatius and the websites know about watches.
Suffice to say, had you done your due diligence you would have spoken to Zaman, gone to ProperWatches.co.uk, and the circular saw would have worked and the script would not have been departed from and therefore no reason to litigate.
But, had you been lazy, not done your due diligence, and taken the advice from Horatius then it’s more likely you would have got bitten. Beware of the sharks.
Prevention is better than cure
Adopting a compliance-led approach is the only way to meet the reasonable care requirement and offer the best protection in the event of an HMRC enquiry.
The best way clients and agencies can protect themselves from the administrative cost and reputational damage from being involved in incorrect determinations and subsequent litigation by HMRC is to play their part in the IR35 compliance process.
You certainly don’t want your firms reputation being dragged through a tax tribunal, even if you win.
As the saying goes, “prevention is better than cure.”