Since the introduction of the IR35 off-payroll rules into the private sector, the use of online digital assessment tools has become increasingly popular, which has seen a rise in the number of online assessment tools available.
HMRC’s own Check Employment Status Tool (CEST) has repeatedly come under fire for being inadequate and not reflective of current case law. A number of public sector bodies had relied upon CEST to their detriment and have been found to owe HMRC approximately £268 million combined in underpaid tax and NIC.
So why have online assessment tools to determine IR35 status become so popular? It is likely due to the requirements of the legislation itself. It moved the responsibility to determine a contractor’s IR35 status, in the majority of cases, from the contractor to the end client. For clients that engage a large volume of contractors, the ability to assess their contractors’ IR35 status quickly provides an attractive and cost-effective option.
It is evident that placing reliance on CEST in isolation would not be prudent, but it begs the question:
Is there an online digital assessment tool that can be relied on?
To answer that question, we need to look at the legislative requirements – it follows that a process, automated or otherwise, can only be relied upon if it addresses all conditions of the legislation.
The legislation requires that medium and large end clients must:
- Make a Decision. Decide the IR35 position of every engagement by reviewing all contracts/paperwork in the supply chain and working practices.
- Take reasonable care. You must evidence the reasoning behind your decision was reasonable.
- Issue a decision. Provide a Status Determination Statement (SDS) to the contractor and the agency (if applicable).
- Implement a disagreement process. You must create and implement your own process for any contractor disagreement.
Automation can clearly form part of the decision-making process. A system should be able to document the process by which an end client can demonstrate reasonable care and the key outcome of any tool must be the efficient issue of the SDS.
Those businesses that fall within the legislative requirements can outsource the decision-making process (by virtue of online assessment tools or otherwise) but they cannot divest themselves of the obligation to take reasonable care. This rests solely with the end client, if it is found they have not taken reasonable care, they assume potential liability.
It also follows that the quality of the tool will largely affect its reliability. An assessment platform that requires questions to be answered in respect of the working practices of an engagement, both by the end client and the contractor, will satisfy part of this ‘reasonable care’ (and of course the quality of the questions will very much affect that reliance).
What cannot so easily be determined by an online tool, however, is an assessment of the contractual documentation. The courts, and HMRC, make abundantly clear that consideration of the contractual framework must be given in order to determine the existence of IR35.
Contracts are invariably nuanced - cases have been won and lost on the use of the words ‘reasonable’ and ‘propose’ depending on how they appear in clauses. Courts have scrutinised contracts to determine their true application, including whether the style of a particular clause follows the style of the contract in general.
To our knowledge, a commercially available AI software program sophisticated enough to examine the nuances of a written document and interpret its meaning within the law on IR35 does not currently exist. Instead of this, does a series of questions asking parties to confirm what is in a written contract achieve the level of reasonable care needed? The short answer is no.
In the event of an HMRC Enquiry or Tribunal Hearing, the actual contracts, not questions on the contracts, will be scrutinised.
It, therefore, follows that the question to be asked is: Can a solely automated process in isolation be relied upon to determine IR35?
The answer is no.
A tool in isolation cannot provide the whole answer and therefore cannot satisfy reasonable care. For most end clients wanting to be able to demonstrate reasonable care and protect the whole of the contractual chain, there are three elements:
- Contractual framework: Due diligence review of all contracts and paperwork in the supply chain.
- Working practices: Being able to combine the view of both end client and contractor as part of an (automated) SDS management system.
- Protection: Typically through an insurance policy which covers the cost of dealing with an HMRC compliance investigation and any tax liability which might arise.
Without (human) professional support and expertise, end clients won’t achieve the compliance and protection they so clearly need.
An online assessment tool can provide some of the answer, but not all of it. Without some kind of human due diligence, end-clients are leaving themselves exposed to significant liabilities.
However, all assessment tools aren’t equal, for an online assessment tool to be considered fit for purpose, it must address the following criteria in order to contribute effectively to the overall IR35 decision-making process:
- Question sets and weighted scoring by IR35 specialists based on case law precedent
- Able to deal with a large volume of IR35 assessments and at speed
- Provide indicative role-based assessments in order to advertise contractor engagements
- Able to acknowledge both end clients and contractor's view of the arrangements
- Create an audit trail
- Provide a contractor management system
- Be intuitive and straightforward to use
- Supported by an IR35 specialist
Taking advantage of digital automation to assist clients to meet their IR35 obligations both cost-efficiently and quickly is a natural progression. But it is still the human support and an insurance policy to help defend the client's (and recruitment agency’s) tax position, which allows you to be genuinely IR35 tax safe.