What is IR35?
IR35 is a set of tax laws designed to figure out whether a contractor is genuine or operating as a disguised employee and avoid tax.
That’s it in an extremely loose nutshell.
Previously, contractors themselves have been responsible for figuring out if they fall inside or outside IR35 and then paying the correct amount of tax themselves.
The new IR35 legislation introduced in April 2020 shifts responsibility for assessing IR35 obligations from the contractor or PSC to the end-user, that is the company that uses contractors. That’s hiring managers and people in recruiting positions.
And according to the Finance Bill released earlier in 2019, it was confirmed the ‘client’ or ‘hirer’ are the ones responsible for any tax shortfalls, as well as deciding if the contractor falls inside IR35.
Where the end-user concludes that IR35 applies, the company who pays the contractor (which may be the end-user themselves, a recruitment agency, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.
Under the proposed changes, the new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
The new rules will apply to
Medium and large businesses in the private sector that are the end-user of the worker’s services,
The party that pays the contractor, which could be the recruitment agency in some cases
Contractors providing services to medium and large businesses
IR35 Off-Payroll Changes and Reasonable Care
With these changes, HMRC has conceded that the scale of change is massive.
To protect the contractor, who suddenly have control of their determination taken away, HMRC has introduced a ‘reasonable care’ clause.
HMRC defines reasonable care as “doing everything you can to make sure the … documents you send to HMRC are accurate”. It also states that it will take “individual circumstances into account when considering whether you’ve taken reasonable care”.
The sense we have from HMRC is that it will set the standard appropriate to the entity it is testing. In the case of medium or large-sized businesses, especially those with an HR department, HMRC will expect thoroughness and diligence.
What are Blanket Assessments?
HMRC has built a "reasonable care" clause into their legislation but it’s one of the many areas in the legislation that is shrouded in mystery.
Failure to elaborate on this clause has led to increased use of Blanket Assessments. The practice of automatically assessing a contractor or group of contractors based on criteria that sit outside of the standard assessment and determination process and therefore do not carry "reasonable care".
Usually, blanket assessments come in two different forms:
If the end-user of a contractor doesn’t go through a proper assessment
If the end-user applies the same determination to a role
Making status determinations based solely on the assessment of a job description or role also falls a long way short of reasonable care.
IR35 Reasonable Care Clause
If the impending doom of IR35 scares you as a hiring manager, you may think that the easiest solution for you would be to assess your contractors en masse.
Better to be safe than sorry, right? Wrong.
It’s actually better to be structured than sorry.
HMRC are looking for a paper trail when deciding on reasonable care. They’re looking for evidence that you have taken a personal look at every single one of your contractors and audited them individually.
You need to be thorough. You need to be diligent.
Employment status lawyers have noted that, in the context of a contractor facing an IR35 enquiry, taking reasonable care constitutes:
Acquiring independent legal advice
Making a full assessment on an individual basis.
Adhering To The IR35 Reasonable Care Clause
Does it need to get any more complicated than treating each of your contractors with diligence and taking each of their determinations on a case by case basis?
Seb Maley, CEO of Qdos Contractor, said: “Having a clear audit trail and input of both the contractor and client in the process is vital.
“Wrongly placing contractors inside IR35 will come at a significant cost to contractors themselves, with public sector bodies and agencies suffering too if a lack of care is taken.”