IR35 software could make or break your 2021
IR35 is tricky and choosing the wrong status assessment solution could be a costly mistake. We've broken down the options, so you don't have to.
If you’re a PSC contractor, or you work with them, then you really should have heard of the IR35 reform by now. Also known as the off-payroll working rules, IR35 is designed to separate ‘genuine’ contractors from disguised employees and to ensure the latter are declared as such so that they pay the appropriate level of tax. As things stand, the contractor is responsible for declaring their IR35 status, and are liable for any taxes arising.
However, come April 2021, both responsibility and liability will shift, with the end client becoming responsible for issuing a Status Determination Statement (SDS), while the fee-payer (whoever actually pays the contractor invoices) holds the tax liability. These reforms were due to launch in April 2020 but were delayed due to the coronavirus pandemic. However, they are now set in stone for April 2021 and are unlikely to change again.
The encroaching reforms have also given rise to off-payroll solutions, designed to help end clients and/or contractors to determine status for any given engagement. The best known of these is HMRC’s very own Check Employment Status for Tax (CEST) tool.
The history of CEST
In March 2017, a new IR35 Employment Status Test was launched by HMRC. Over time, it has evolved into the CEST tool used today. However, the tool has been widely criticised, and its accuracy has been contested by contractors, clients, and industry bodies.
For instance, when discussing HMRC’s poor run in tribunal cases, the Recruitment and Employment Confederation stated “Having lost those cases, the rationale for CEST must be wrong, so how can parties be confident in CEST?”
Ernst & Young, meanwhile, have added ““We consider that relying on the CEST tool, as it currently stands, cannot be justified under law, based on a variety of issues that have not been resolved yet.”
Kingsbridge’s Head of Tax Andy Vessey, who has defended more than 500 IR35 investigations (and won most of them), has previously commented, “The problem with CEST is that it is a ‘one size fits all’ tool and is not industry specific. I personally would not recommend relying on it as I don’t believe you can fully automate the employment status process due to the subjective nature of some of the employment status tests.”
“Although automation does have its place, but only for the initial process,” Vessey continued. “Behind that should be an element of human interaction where people who are experts are able to drill down and look at the whole picture to fully assess and make a judgement, which CEST cannot do as it is an automated tool.”
Vessey’s point is supported by the fact that in around 15% of cases, CEST is unable to make a determination which would suggest the tool fails to help those with the cases in most need of expert advice. This is because it generally tries to condense some very complex legislation into a very brief questionnaire, lacking the more nuanced approach necessary for a subjective piece of legislation.
HMRC’s response, however, has always been to stand by CEST. When asked in a September 2017 webinar, for example, why CEST omitted to examine Mutuality of Obligation (MOO) – one of the main pillars of employment case law – HMRC policy advisor Mark Frampton told attendees that CEST assumes MOO to be present in all engagements. However, all contractors and end clients are aware that this is not the case and court rulings have since rejected it.
What other options are there?
You’ll be pleased to know that there are other options out there if you don’t want to try your chances with CEST. What do they look like?
- Firstly, there are manual reviews. These usually involve an independent third party – who is an expert in IR35 – examining your contract and working practices to determine if you are inside or outside IR35. This approach gives you expert opinion and all the nuance you could wish for. However, it can be time consuming and more costly in general.
- The other main option is automated reviews. These are tools not too dissimilar to CEST, yet they tend to ask more detailed questions in order to give a more accurate answer. However, there still remains the issue of borderline cases: fully automated software cannot make a decision or advice on these.
However, there is a third, best-of-both , such as that offered by Kingsbridge and co-created by Andy Vessey. This kind of software allies the ease of use and instant determinations offered by automated software with the inimitable expertise and human judgement of a dedicated IR35 team who can take a manual look at borderline cases in order to give an accurate decision.
With this kind of software, contractors, recruiters, and end clients can expect an instant result in clear cut cases, with a downloadable report offering feedback and advice on specific answers. This is important so that you can understand why a particular decision has been reached. If your result is indeterminate, you’ll be contacted by an IR35 expert, who will discuss your review and get more detail from you in order to reach an informed decision.
How to choose the right status tool
It’s important that you research the status determination options available thoroughly and pick the right one. For contractors, picking the wrong one could mean an incorrect inside IR35 result, equally a substantial drop in pay. For the post-April fee-payer, the consequences could be even more costly.
You must think of the needs and wants of your business. Do you require more support or training? Do you have the luxury of waiting for status results, or do you need a quicker option? Have you got the in-house skillset and resource to assess IR35 statuses yourself? The likelihood is that you’ll need to outsource some help to tackle the reform in a way that safely satisfies HMRC’s ‘reasonable care’ requirements.
The IR35 reform implementation date of 6 April 2021 has been cemented and with less than six months to go, time is quickly running out to make sure you have a suitable process in place. Last year was a practice run, but there is no room to get it wrong now. Don't shoot yourself in the foot with gross risk-aversion. Those 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 come April next year.
This article was contributed by Kingsbridge Group