HMRC internal manual

Employment Status Manual

ESM10014 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: reasonable care

Sections 61N and 61NA Chapter 10, Part 2 ITEPA 2003
Regulations 14 and 14A Social Security Contributions (Intermediaries) Regulations 2000

The client must take reasonable care when determining whether the worker would have been an employee if they were engaged directly. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC will rest with it. That liability will always remain with the client unless it takes reasonable care in reaching its conclusion set out in the SDS. Reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position. HMRC recognises that the circumstances of clients completing a SDS will vary greatly.

While each client has a responsibility to take reasonable care, what is necessary for each client to discharge that responsibility must be viewed in the light of their abilities, experience and circumstances. For example, we would expect a higher degree of care to be taken by a large multi-national company with its own internal finance function than of a much smaller entity.

HMRC expects each client to carry out a complete and thorough determination and preserve sufficient records to show how the decision was reached. Standard document retention rules apply to the SDS. A client with a small, straightforward workforce may only need a simple regime, provided it follows it accurately. Whereas a client with a larger and more diverse workforce may need to put in place more sophisticated systems.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.                

Examples of behaviours that would indicate a client has taken reasonable care include, but are not limited to:   

  • accurately applying and keeping a record of the employment status principles (ESM0500)
  • accurately completing and applying the results of HMRC’s Check Employment Status for Tax (CEST) tool (link is external)
  • applying HMRC guidance on determining status
  • seeking the advice of a qualified, professional advisor
  • having someone with a good understanding of the work to be undertaken involved in the determination process
  • ensuring determinations made for existing engagements are accurate, so mistakes can be identified and not repeated in future determinations.
  • considering whether there is a new contract or a continuance of an existing contract where the terms and conditions or working practices of an engagement change.
  • making a new status determination if there are material changes to a worker’s terms and conditions, or working practices
  • reviewing the processes being applied and amending for future determinations where necessary
  • ensuring it checks and reviews processes of other parties where it subcontracts the determination process to another party. The client remains responsible for the accuracy of the SDS even if it subcontracts that responsibility to another party.

Examples of behaviours which do not constitute reasonable care include, but are not limited to:

  • determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case
  • making a determination when it is known and planned that the contractual terms or working practices will change and so the determination does not represent the true nature of the engagement
  • determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker
  • failing to reconsider determinations where there has been a material change in circumstances
  • an absence of any proper support or training within the organisation to enable those individuals responsible for making determinations to accurately consider the off-payroll working rules
  • inputting inaccurate information into CEST
  • failing to take account of all relevant evidence
  • failing to ensure that the person tasked with completing the SDS possesses the knowledge required to complete it and is provided with the required level of support to do so
  • the client subcontracting the SDS process to another party and not confirming the accuracy of that conclusion and the reasons for it.

It is acceptable for a client to make a determination for a group of workers, providing those workers are engaged under the same contractual terms and conditions, and in practice work under the same terms and conditions. However, if determinations are made for groups of workers where the terms and conditions are not the same, this would not be taking reasonable care. If the client has not taken reasonable care, the responsibility for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC is the client’s. This is the case even if another party has already made deductions in line with the original determination. Corrections for that other party can be made (see ESM10019) as the client will be required to meet the liability.

If a client is not already the deemed employer, and has taken reasonable care and fulfilled its other duties (such as issuing the SDS), the responsibility for deducting tax and NICs and paying these to HMRC will not rest with it. This is the case even if it turns out that the client got the decision wrong.

EXAMPLE OF CLIENT TAKING REASONABLE CARE

A large-sized company recognises the need to begin preparations for the introduction of the off-payroll working rules. It provides comprehensive training around the employment status and off-payroll working rules to a group of directly impacted colleagues, including introducing processes requiring all existing contracts with workers who provide their services through intermediaries to be reviewed to determine whether the new rules apply. The client makes it a mandatory requirement that CEST be used (accurately and in line with HMRC guidance) to make determinations and periodically reviews its determination process to ensure it is robust.

As the company has taken prudent and reasonable steps when determining whether the off-payroll working rules apply, it would be considered to have taken reasonable care.

EXAMPLE OF CLIENT TAKING REASONABLE CARE

A large-sized company needs to make a SDS in relation to the off-payroll working rules. It ensures that those making the SDS have a good understanding of the working arrangements to which the SDS relates. It also ensures that HMRC guidance on employment status is applied and CEST is used in accordance with guidance and answered accurately based on the information they have.

The business has staff in similar roles but the terms and working practices do differ. The business ensures that the determination for this role is based on its own facts and does not determine the outcome based on the other roles.

As the company has taken prudent and reasonable steps when determining whether the off-payroll working rules apply, it would be considered to have taken reasonable care.

EXAMPLE OF A CLIENT NOT TAKING REASONABLE CARE

A medium-sized company engages an agency to supply workers. The workers supplied by the agency operate through their own PSCs. The client decides not to take any steps to prepare for the introduction of the off-payroll working rules. It elects to simply determine that all workers who provide their services through a PSC will be caught by the new rules, because they undertake similar roles and are engaged under similar terms and conditions. It does this, believing that this will protect it from any liability to pay tax and NICs on payments to those workers. The client passes the same SDS to every worker and the agency.

Even though the client has determined that the off-payroll working rules apply to the engagement, and passed on the SDS to the worker and agency, as the company has not taken prudent and reasonable steps when making their determinations, liability rests with it. The client has not considered the status of the workers contracting under different terms and conditions, so it has not satisfied the condition to take reasonable care. The responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due rests with the client. If any workers were incorrectly determined as inside the rules when they are in fact outside the rules, any amounts tax and NICs amounts deducted from them should be refunded (see ESM10019 for further detail).

EXAMPLE OF A CLIENT NOT TAKING REASONABLE CARE

A large-sized company engages an agency to supply workers. The workers supplied by the agency operate through their own PSCs. The client decides to subcontract the status determination and production of the SDS to a third party. The client does not introduce any checks or processes to ensure the determinations have been carried out properly. The client also does not ensure the third party is suitably qualified to make determinations on employment status for tax.

As the client has taken no steps to ensure determinations have been carried out properly, they have not taken reasonable care. The responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due rests with the client.