Under the off-payroll working rules, clients must take reasonable care when assessing whether a contractor’s engagement falls inside or outside the rules, and when issuing a Status Determination Statement (SDS).
It is a legal rather than an optional requirement under Chapter 10.
If a client fails to take reasonable care when reaching its conclusion, responsibility for PAYE and NICs can rest with the client rather than passing to the fee-payer elsewhere in the supply chain.
You can use our IR35 Responsibility Checker to work through who makes the IR35 decision and where the PAYE responsibility sits in a particular engagement.
You can read HMRC’s view of reasonable care in the Employment Status Manual at ESM10014.
Where reasonable care fits into SDS compliance
An SDS must be passed to the worker and to the next party in the chain, and it must include the reasons for the conclusion.
GOV.UK’s client guidance makes that explicit and also repeats the point that the client must take reasonable care when making the determination:
Off-payroll working for clients.
Read our guide to Status Determination Statements.
HMRC’s definition in plain English
HMRC describes reasonable care as acting as a “prudent and reasonable person” would in the client’s position.
That phrase matters because it is deliberately contextual.
What is reasonable for a large organisation with a dedicated tax team and an established contractor population will generally be more demanding than what is reasonable for a smaller business with fewer resources.
Taking and proving reasonable care is mainly about the processes you put in place.
Did the client take sensible steps to produce a status decision? Did they use the right information? Were the right people consulted? Did they keep a record of how they reached the decision?
What HMRC generally expects a client to do
HMRC doesn’t publish a single checklist of how clients should prove they have taken reasonable care, but the contents of ESM10014 and the wider GOV.UK guidance make the position clear.
A client should be able to demonstrate most of the following.
1) Make an engagement-specific assessment
Reasonable care means taking account of the particular facts and circumstances of the engagement.
A blanket decision – “all PSC contractors are inside IR35″ – is hard to defend as careful decision-making because it ignores the details that actually determine status.
Unfortunately, as many contract workers know only too well, blanket decisions are very common.
Role-based assessments are not necessarily incompatible with reasonable care where the relevant contractual terms and working arrangements are genuinely the same. Problems arise when the same determination is applied across a role or group despite material differences between individual engagements.
Two workers can share a job title but have very different levels of autonomy, substitution arrangements, deliverables, and financial risk exposure.
2) Consider the contractual terms and how the engagement operates
A worker’s employment status is not determined simply by looking at a contract template in isolation.
In tax status cases, you must first establish the contractual terms using ordinary principles of contractual interpretation. Evidence about how the engagement operates may also be relevant when establishing the contractual relationship and applying the employment status tests.
That means talking to the people who understand the work, not just procurement or HR, and making sure the status assessment is based on accurate information about the engagement.
You can find out more about the key factors to determine status here: IR35 status tests.
3) Gather enough facts to answer status questions properly
Reasonable care is hard to evidence without basic facts about the engagement. That means understanding the scope of work, whether the role is deliverable-based or time-supervised, and who decides how the work gets done.
It also means understanding the contractual right of substitution and any relevant restrictions, whether the worker uses their own equipment, how change requests are handled, and whether the worker bears any financial risk.
On the contractor side, these facts also shape what evidence is useful if HMRC later opens a compliance check.
See: What happens in an HMRC IR35 investigation.
4) Apply a recognised method and save the output
Many clients use HMRC’s CEST tool as part of the status process.
Using CEST does not automatically prove you have taken reasonable care. HMRC says it will stand by CEST determinations provided the information entered is accurate and the tool is used in accordance with its guidance.
CEST can therefore help demonstrate that the client followed a structured approach and captured a record of the inputs and outcome, but the quality of the information entered remains crucial.
Where clients go wrong is treating CEST as a box-ticking exercise and delegating the answers to someone who doesn’t actually understand the engagement.
If the inputs you enter into the tool are inaccurate, the output will be weak as well.
5) Seek specialist help where necessary
A documented and properly informed status process can provide strong evidence that reasonable care has been taken.
If the organisation lacks in-house expertise, there are many expert consultancies that can provide IR35 audits, training, and support.
Where external advisers are involved, the client should always understand what is being issued in its name and why.
Here are some useful materials from HMRC’s ‘help to comply’ guides:
Making status determinations (Help to comply, part 8) and Status determination statements (Help to comply, part 9).
6) Record the reasons and retain evidence
In practice, reasonable care is easiest to demonstrate when a client can produce a file for each engagement: the contract, the working practices questionnaire, who was consulted, which status factors were considered, the reasoning behind the SDS, and any outputs and conclusions from tools like CEST.
If a client is unable to produce its workings, it can be left arguing “trust us” after the fact.
This is rarely a good position to be in during a compliance review.
Common examples of failing reasonable care
HMRC’s ESM10014 provides examples of situations where reasonable care has not been demonstrated.
Here are some recurring ones:
Blanket determinations. Treating all contractors as inside IR35 without considering the relevant facts and circumstances of their engagements is widely criticised because it avoids the status test rather than applying it.
Superficial “paper-only” reviews. Relying on generic contractual documentation without properly establishing the relevant contractual terms and circumstances of the engagement can result in an unreliable determination.
Uninformed CEST inputs. Completing CEST without consulting the people who understand the engagement, or changing inputs until you get an ‘outside’ determination.
Not providing reasons in the SDS. An SDS must state both the conclusion and the reasons for reaching it. Simply telling a contractor that an engagement is ‘inside’ or ‘outside’ does not satisfy this requirement.
No review when material facts change. If the contractual terms or working arrangements change materially over time, the employment status may change as well. A client should therefore revisit a previous determination where relevant circumstances have changed.
Conclusion
If you’re tasked with producing SDSs, a simple way to think about reasonable care is this: you should be able to show that you asked sensible questions and spoke to the right people.
You must establish and consider the relevant contractual terms, obtain accurate information about how the engagement operates, apply the status factors, document your reasoning, and keep thorough records just in case you need to produce them at a later date.
If you can’t demonstrate that you’ve taken reasonable care, the risk isn’t merely that HMRC disagrees with your conclusion; it is that HMRC argues that reasonable care wasn’t taken to produce the determination in the first place. And this is where liability can become very costly.
Read more about the benefits of commissioning a professional IR35 audit.