The concept of "reasonable care" is central to the off-payroll working rules. When an end client determines whether an engagement is inside or outside IR35, they must take reasonable care in reaching that decision. Failure to do so can shift the tax liability from the fee-payer back to the client.
What does reasonable care mean?
HMRC has not provided a precise legal definition of reasonable care in the context of IR35 determinations. However, guidance and case law suggest it means the client must make a genuine, informed assessment based on the actual facts of the engagement. A client cannot simply tick a box or apply a blanket determination without considering individual circumstances.
What demonstrates reasonable care
Actions that demonstrate reasonable care include assessing each engagement individually rather than applying blanket determinations, considering the actual working practices rather than just the contract terms, using appropriately qualified personnel or external advisers to make determinations, documenting the reasoning behind each determination, considering all three primary tests (substitution, control, mutuality of obligation) plus relevant secondary factors, and reviewing determinations when working practices or contract terms change.
What fails the reasonable care test
Actions that may fail the reasonable care standard include applying a blanket inside IR35 determination to all contractors without individual assessment, relying solely on CEST without considering factors CEST does not cover (such as mutuality of obligation), making determinations based on job title or day rate rather than working practices, failing to provide a Status Determination Statement with reasons, or ignoring a contractor's representations when they challenge a determination.
Why this matters for contractors
If a client fails to take reasonable care, the tax liability for an incorrect determination shifts from the agency (fee-payer) to the client. This gives contractors leverage when challenging determinations, as clients have a financial incentive to ensure their assessments are thorough and defensible. When preparing a challenge, highlighting specific failures in the reasonable care standard can be an effective strategy.