A Contractor’s Guide to IR35 - Part 3
In A Contractor’s Guide to IR35 - Part 3, we’ll help you to understand more about reasonable care and HMRC CEST (Check of Employment Status for tax) tool.
What is reasonable care?
To show that as an experienced contractor, you have taken reasonable care, you need to be able to prove that you have read around the subject. This IR35 guide will be a great start to understanding more on IR35 but along with this, further reading around the topic is needed to gain an in-depth understanding.
It also means needing to demonstrate and document how you have worked as a genuine independent contractor. This includes giving examples such as rearranging work to fit around your schedule, turning down work or having suffered a financial loss, to demonstrate that the three key factors indicate a self-employed relationship.
Understandably, not all contractors are that experienced and many would rather display their ability as an expert in their chosen vocation than as tax status expert.
In their Employment Status Manual, HMRC say:
“In HMRC’s view, it is reasonable to expect a person with limited abilities, or who encounters a situation of which they have limited experience, to take care to find out about the correct tax treatment or to seek appropriate advice.”
This would suggest that the safest route for contractors would be to seek independent advice from their accountants and other tax experts. From doing this, they will be able to demonstrate the level of due diligence needed to meet HMRC’s requirement for taking reasonable care.
The rules of IR35 require you to consider every engagement you undertake. To make this process easier, contractors can get an independent and comprehensive review of the engagement through a contract review service.
A contract review considers the contractual terms, compares these to the working practices of the engagement and offers a clear decision on IR35 in a comprehensive report, which allows you to show that you have taken reasonable care.
Getting a contract review can put your mind at rest knowing that you are being taxed on the appropriate basis and can provide an opportunity to buy Fee Protection Insurance for extra security.
As well as that, more crucially, it means that if HMRC do look into your IR35 status and believe that IR35 applies, you can show that you have undertaken more than reasonable due diligence and should avoid a penalty.
Bearing in mind that a penalty usually ranges from 15% to 30% of the tax due, investing in a contract review is certainly a worthwhile investment.
HMRC CEST (Check of Employment Status for tax) tool
Contractors can get a status decision for free using the CEST tool provided by HMRC.
Originally the tool was developed to support the 2017 off-payroll working changes in the public sector. The tool was made to help public sector bodies who were newly responsible for deciding the IR35 status of the contractors they worked with.
Contractors, agencies and advisers could also benefit from using the tool to determine IR35 status.
The tools efficiency has over the years raised questions. Some of the key issues are as follows:
- The determination is based on a series of Yes/No answers which do not really delve into the nuances of status. If deciding IR35 status was a simple as that, there would not be hundreds of IR35 and status cases being handled at tribunal.
- With no questions centred around mutuality of obligations (MOO), the test is not complete.
- A strong understanding of IR35 is needed and while the three key status factors may seem straightforward, the principles of these factors are often not as obvious in a contract.
- Some people feel it does not provide decisions that are in line with a good amount of court decisions.
- AI tools which rely only on automation, can be manipulated, which is why HMRC are completely clear that it will only stand by the results CEST provides, given that the information added into the tool is accurate.
HMRC’s Employment Status Manual (ESM0502) provides advice on fact finding techniques to determine status.
It states: “In order to establish whether a worker, who is not an office holder, is an employee or self-employed, it is firstly necessary to establish the terms and conditions of the engagement.”
“This will normally be established from the contract between the worker and the engager, which may be written, oral, implied or a combination of all three. Having established the terms and conditions it is necessary to consider any surrounding facts that may be relevant.”
While opinion pieces and guidance can be helpful, it is ultimately down to case law to determine the status of an engagement.
HMRC’s Employment Status Manual follows the established practice of Tribunal Judges that to begin with is a consideration of the contractual terms and how this applies in practice.
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