Nearly six months on from the introduction of IR35 into the private sector, many businesses are still early in their IR35 journey and yet to embed their practices and processes into business as usual.
But with many high-profile government bodies hit with IR35 tax bills this year, now is the time to question if your IR35 approach is compliant, particularly if an automated tool was used.
Here we explore three reasons why an automated tool doesn’t guarantee IR35 compliance.
- The output is reliant on the input
The government bodies recently in the headlines for IR35 tax bills used online automated tools to determine the status of their contractors. From the bills that have been issued, it’s clear that these tools alone do not meet HMRC’s guidelines for reasonable care or ensure compliance with the legislation. In fact, in the HM Courts & Tribunal Service financial report, it states that a £12.5m deduction was for ‘incorrect assessments of the employment status of workers’.
Any online or automated tool is only as accurate and useful as the information put into them. If a question is misunderstood or an inaccurate answer input into the software, the outcome will not reflect the role of the contractor and will likely be incorrect. When using an online tool it could seem like a fairly straightforward and easy process but there is a huge margin for error – particularly if the person using the tool isn’t familiar with how it works, IR35 legislation and the detail of a contractor’s role.
IR35 legislation is extremely complex and too nuanced for relying on software alone. HMRC’s own CEST tool produces an undetermined status for approximately 20% of contractors, which then need specialist and experienced professionals to accurately produce a status determination.
- Only using an automated tool doesn’t meet reasonable care guidelines
HMRC issued detailed guidelines of what does not constitute reasonable care and the need for training is clearly mentioned in several places. For example, ‘an absence of any proper support or training within the organisation to enable those individuals responsible for making determinations to accurately consider the off-payroll working rules’ and ‘failing to ensure that the person tasked with completing the SDS possesses the knowledge required to complete it and is provided with the required level of support to do so’. This is a clear risk and potential breach of reasonable care if untrained staff are using an online tool to produce status determinations.
Another example of where training and specialist knowledge is important for reasonable care is ensuring that all relevant evidence is taken into account. If contractual clauses aren’t considered and information is put into an online tool this would also negate reasonable care, return an incorrect assessment and put the business at risk of non-compliance.
For these reasons, it vital that management and evaluation processes are in place, like they would be for any other risk management issue, to ensure the rules are being applied adequately.
- IR35 is an ongoing management issue not a one-off exercise
Another misconception is that using an automated tool and producing status determinations brings your IR35 journey to an end. But this is not the case, and would see you falling foul of HMRC’s guidelines for reasonable care.
Job roles and contracts often evolve as a project progresses so it’s vital that HR teams, hiring managers and others within the business are appropriately trained and fully understand IR35 – a value added service that is unlikely to be offered with an automated tool. Having this knowledge means that people within the business will be able to recognise when a contract has changed and there is a need to reconsider IR35 status.
But even more importantly, this also needs to be supplemented by regular sample audits, at a frequency and sample size relative to risk, to check IR35 status determinations. This helps meet reasonable care guidelines by showing an ongoing commitment to ensuring IR35 determinations are correct.
Automated online tools such as CEST were used by many businesses to implement a quick fix solution ahead of the IR35 deadline in April. But as IR35 processes now need to become embedded throughout the organisation, now is the time to look toward best practice and implement a comprehensive approach to IR35 to avoid surprise tax bills in the future.
Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements.