Why Reasonable Care (IR35) Matters in Recruitment

HMRC can issue a tax liability of up to 100% of the unpaid PAYE and NICs if an end client or fee-payer fails to demonstrate reasonable care in their IR35 status determinations. Since the off-payroll working rules shifted responsibility to medium and large private-sector clients in April 2021, staffing agencies have sat squarely in the firing line as the fee-payer in most contractor supply chains. When the client gets the determination wrong and the agency pays the contractor outside IR35, HMRC looks to the fee-payer to recover the underpaid tax. That is a significant financial exposure for agencies who had no involvement in writing the Status Determination Statement.

The reasonable care standard is not a bright-line test. HMRC judges it by looking at whether the party making the determination applied genuine, documented effort to reach the correct conclusion. A rubber-stamp process, a blanket determination applied to all contractors in a role category, or a SDS produced without reviewing the actual working arrangements will almost always fail that standard. Agencies need to understand what reasonable care looks like not just in their own processes but in those of the clients they supply, because that client's failures can become the agency's liability.

The stakes extend beyond the immediate tax bill. A finding that reasonable care was not exercised can trigger a deeper investigation of the agency's entire contractor book, not just the individual in question. Agencies managing large contractor populations, particularly in IT, financial services, or engineering, should treat reasonable care as an ongoing compliance programme rather than a one-time box to tick at the start of each placement.

How Reasonable Care Works

Reasonable care under IR35 operates through the Status Determination Statement process. The end client must produce a SDS for each contractor engagement, setting out the determination and the reasons behind it. The contractor and the agency (as the fee-payer immediately below the client in the chain) must both receive a copy. If the client fails to pass on the SDS, or fails to produce one at all, the status determination responsibility passes down the chain to the agency itself.

For the determination to demonstrate reasonable care, the client needs to assess three core factors: substitution (can the contractor send someone else to do the work?), control (who decides how, when, and where the work is done?), and mutuality of obligation (is there an expectation of ongoing work and pay beyond the specific assignment?). A technology company hiring a senior developer through an agency, for example, should be documenting whether that developer can provide a substitute, whether they set their own working hours, and whether there is any obligation to offer further contracts on completion.

Agencies should require clients to confirm their SDS process before supplying contractors, and many now include contractual warranties that the client has applied reasonable care. When a client cannot articulate how they reached their determination, that is a red flag. Passing a defective SDS down the chain does not insulate the fee-payer from liability if the determination is later found to be careless. Some agencies have moved to requesting sight of the client's internal SDS documentation before processing first payment, adding a layer of verification that courts have recognised as evidence of due diligence by the fee-payer.

Reasonable Care vs. Blanket Determinations

One of the most common failures HMRC identifies is blanket determinations, where a client decides all contractors in a particular team or function are inside IR35 without assessing individual engagements. This is almost never consistent with reasonable care, even though it reduces administrative workload. A client applying a blanket inside determination may appear to be managing their own risk conservatively, but they are simultaneously failing the reasonable care standard and generating a dispute process burden, because contractors in genuinely outside-IR35 arrangements have the right to formally challenge the SDS.

Reasonable care requires individual assessment. That does not necessarily mean a full legal review of every engagement, but it does mean that the specific working arrangements of each contractor must be considered, documented, and reflected in the determination. Agencies should push back on clients issuing identical determinations across materially different roles.

Reasonable Care in Practice

A regional staffing agency supplying five contractors to a logistics firm requests sight of the client's SDS for each placement before processing the first payment. The client sends identical determinations for five contractors doing materially different work. The agency's compliance lead flags the discrepancy, raises it formally with the client in writing, and documents the exchange. The client revises three of the determinations following the query. Should HMRC later investigate, the agency can demonstrate it did not simply accept a defective process and actively sought correction. That paper trail, a request for review, a written response, and revised SDSs, is what reasonable care looks like from the fee-payer's position in practice.