The words “reasonable care” have been parachuted into final tax legislation for IR35 in the public sector.
It means public sector bodies must “take reasonable care” when deciding the IR35 status of limited company freelancers they engage from April 6th 2017.
If they fail to take reasonable care, which experts say includes simply blanket assessing all their 'Ltd' freelancers as inside IR35 (or outside IR35), then they become the ‘fee-payer.’
Becoming the fee-payer makes them -- the public sector body -- 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 at 61T6c)] means that public sector clients must not make general, blanket determinations” of freelancers’ IR35 status, says Qdos Contractor.
“[Instead, 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,” says accounting firm Brookson, which loosely translates the term as ‘to take a prudent approach.’
“[The reasonable care provision] is good news for agencies,” added the firm’s Matt Fryer. “This may make it easier for the agency to accept the public sector body's IR35 opinion.”
He thinks agents will welcome another last-minute tweak to the April 6th rules, as under it clients must tell fee-payers the IR35 status “on or before the time of entry into a contract.”
So 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 bad news for public sector bodies,” Mr Fryer said of 61T2a). “They [now] 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 'Ltd' freelancer'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 freelance contractors ‘inside’ or ‘outside’ IR35, having a clear audit trail and input of both the contractor and client in the process is [going to be] vital,” said Qdos Contractor’s CEO Seb Maley.
“Wrongly placing freelance 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.”
In relation to that cost, the draft bill says (at 61W) it will be optional for fee-payers to deduct certain expenses (only those allowable for direct staff) from the PAYE calculation.
So, it will not be mandatory for fee-payers to take account of a limited company freelancers' expenses when totting up the tax due, seemingly on the basis that freelancers will be on the same footing as full-time employees.
Likely to be welcomed 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 Employment Status Service.
“Serious concerns remain over the effectiveness of HMRC's IR35 tool”, Qdos’ Mr Maley said last night. “And without in-house IR35 expertise, the immediate concern is that public sector clients are simply not equipped to make [the necessary status] decisions”.