The words “reasonable care” have been parachuted into this week’s final tax legislation for IR35 in the public sector.
It means public sector bodies must “take reasonable care” when deciding the IR35 status of PSC contractors they engage from April 6th 2017.
If they fail to take reasonable care, which experts say includes simply blanket assessing all their PSCs as inside IR35 (or outside IR35), then they become the ‘fee-payer’.
Becoming the fee-payer makes them – the public sector – responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance.
These responsibilities are also foisted on public bodies that fail to relay their IR35 decision within 31 days, as widely expected since draft rules were published in December 2016.
But under this week’s final IR35 legislation in Finance Bill 2017, bodies that abide by this timeframe can still become the fee-payer, if it is found they failed to exercise reasonable care.
Put simply this (new reasonable care clause) means that public sector clients must not make general blanket determinations of contractors’ IR35 status. They should ensure every contractor engagement is considered independently and fairly or they could be liable if it was proven that reasonable care was not taken.
Not Easy to Define
In the tax sphere, however, ‘reasonable care’ is not something which is easy to define. It is generally considered to loosely translate to “take a prudent approach”
However, the reasonable care provision may be good news for agencies. It may make it easier for an agency to accept the public sector bodies’ opinion.
Another last minute tweak that will please agents is that the client must tell fee-payers the IR35 status “on or before the time of entry into the contract.”
No longer will agencies need to ask for the IR35 position and then have to wait 31 days for it; they can simply just wait to be informed but if they aren’t told they have no PAYE risk.
This is unfortunately bad news for public sector bodies. They will have to quickly tell their agencies about the IR35 status of all workers or they carry the IR35 risk
There is no let-up for clients if the PSC’s contract is already underway – then, the public body must notify the fee-payer before the first payment is made after April 6th 2017.
Clients and agencies can suffer too
This provision and the reasonable care provision, puts the onus back onto the client and, for non-compliance with either, the client becomes the fee-payer with all the tax duties such a role entails.
Regardless of whether public sector bodies decide contractors inside or outside IR35, 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 as a significant cost to contractors themselves, with public sector bodies and agencies suffering too if a lack of care is taken.
In relation to that cost, the draft bill says it will be optional for fee-payers to deduct certain expenses from the PAYE calculation
So, it will not be mandatory for fee-payers to take account for PSC’s expenses when totting up the tax due, seemingly on the basis that contractors will be on the same footing as permies.
Likely to be welcomes by fee-payers over concern that such deductions might be tricky to always administer, the change seems minor amid the still major questions about the ESS.
Serious concerns remain over the effectiveness of HMRC’s IR35 tool, as previously mentioned on this blog. Without in-house IR35 expertise, the immediate concern is that public sector clients are simply not equipped to make the necessary decisions