In defence of IR35 automation tools…
Eight months have passed since the April 6th off-payroll reforms took effect in the private sector and despite what you might hear from a government department, the harmful impact of the reforms are tormenting contractors and businesses who rely on their talent.
But it is easy to carry on criticising IR35, CEST and HMRC because there is so much to complain about, yet unfortunately, it does very little to help guide and support contractors and businesses on how to practically manage the legislation and tools are definitely part of the mix, writes Nicola Hayman, legal manager at Kingsbridge.
There are many different solutions, offerings and opinions out there but there is one argument that all market experts seem to agree with - contracting must continue. Contractors remain a vital part of the UK’s workforce; their skills and flexibility are heavily relied upon and they contribute massively to the UK economy. As much as we wish it wasn’t the case, IR35 isn’t going anywhere, so we must learn to deal with it.
We are slowly starting to see end-hirers re-thinking their IR35 strategy, especially those who initially made ‘No PSCs at all’ policies. However, the confusion around the best way to determine status continues. CEST has been and will remain to be a hotly debated subject.
But surely an automated tool that is free and developed by HMRC themselves would be the best solution? Unfortunately, this isn’t the case. Usage data in the period November 25th 2019 to August 31st 2021 shows that it was unable to deliver a verdict over 233,000 times – that’s 21% of all outcomes where it cannot determine status. Of course, when CEST cannot produce a determinative result, then the taxpayer is left to work it out themselves, contact HMRC or seek professional advice. So is this the case for all automated tools?
CEST is tarnishing tools
Because of the inherent problems with CEST, it often gives automated solutions a bad name! However, the issue with CEST isn’t that it’s automated, it’s that it is fundamentally flawed. In an ideal world, of course, every single IR35 determination would be carried out by a tax or legal expert but unfortunately, it just makes no commercial sense.
Businesses that engage with hundreds if not thousands of contractors simply do not have the time, resources or budget to do this. In short, manual reviews are going to be high in accuracy (assuming a consistent approach is taken to reviewing status by the assessor), but will struggle to deal with high-volume demands and speed which are an absolute necessity when dealing with a flexible resource.
Above and beyond just a list of questions
The Freelancer & Contractor Services Association’s chief executive Phil Pluck rightly pointed out at the Lords’ first oral evidence session: “There are many tools out there which are based on algorithms that are very good”.
Indeed, most prudent IR35 assessment tool providers, whether automated or not, will go above and beyond just giving the user a set of questions to work through (as per CEST). In most cases, the supplier will provide extensive training programmes to educate your supply chain about IR35, including how to understand and interpret key status tests and ongoing support where required, such as on borderline or indeterminate results that require interaction from IR35 specialists to help reach a determination.
Of course, we must remember a tool is only as good as the information that is put in (a bit like a contract review is potentially only a good as the info that gets handed to the contract reviewer). Therefore as long as appropriate training has been provided, and there is advice/human intervention involved when necessary, an automated tool is no doubt the most commercially viable method out there today.
Six tool-related questions
When choosing an assessment tool, you must think of the needs and wants of your business and feel satisfied the tool has been created by a reputable organisation. So strongly consider asking the following questions:
- Do you require more support or training and will the tool provider help with that?
- Can you afford to wait for status determinations; via the tool, or other means?
- Have you got the skills to run the reviews yourself?
- What is your capacity to conduct status reviews?
- Has that tool provider company been involved in IR35 status for a long time?
- Have they actually ever defended a contractor against HMRC?
These are just a few of the questions that need to be satisfied before paying, in some cases, considerable sums of money for a solution.
Given the soft-landing period from HMRC is ending soon, there is no room to get IR35 wrong. But if you’re an engager, don't shoot yourself in the foot with gross risk-aversion. Those organisations that invest in a good IR35 process and fair, accurate status determinations will absolutely be the ones that get the cream of the contracting crop.