How plausible is it to boil down decades of employment status case law into a simple computer algorithm? As an IT graduate and former software developer turned employment tax specialist, this is a question I've often pondered from both perspectives - the programmer sat on my left shoulder and the tax advisor on my right.
What is the challenge?
Accurately determining status for tax (and, separately, employment law) purposes is crucial when an organisation engages with an individual, whether it be directly, via a limited company or an agency. Getting this wrong can not only be costly in terms of PAYE liabilities and penalties, but also from a reputational perspective - just ask the BBC. Futhermore, it can impair relationships with individual contractors and also agencies, potentially resulting in a talent attraction and retention challenge.
An accurate status or IR35 decision is not only dependent on the quality and breadth of pertinent information available about the facts of a contractor's engagement and their wider business, but also on the interpretation of these facts as they apply to existing law and the relative weighting of each of the facts.
A particular current challenge exists for public sector bodies struggling with new IR35 obligations that now require them to determine whether any contractors providing their services via a Personal Service Company (PSC) are in scope of the rather ambiguous legislation. And private sector businesses cannot rest easy as it it surely only a matter of time before similar rules are introduced for them - there is already much talk of 'levelling the playing field' and we await the promised 2018 consultation on tackling private sector non-compliance.
Is technology the answer?
HMRC’s Check Employment Status for Tax (CEST) tool was touted as the 'silver bullet' for any doubts over status and IR35. This was perhaps viewed with great relief by public sector bodies struggling to adapt to the recent IR35 reforms.
I don't doubt that this approach can work for simpler cases where the answer is obvious and have in fact seen HMRC's CEST tool handling simpler cases very successfully, as could any human with a good technical background in the rules. However, this nonetheless relies on having accurate and complete information in the first place, answering the tool's questions accurately and without bias (intentional or unintentional) of steering it towards a particular outcome.
However, where information is limited or in more complicated cases, especially those where experienced professionals cannot agree and case law is constantly evolving as new interpretations are found, a technology-based solution appears particularly problematic.
Now, the IT graduate on my left shoulder is big believer in utilising technology to make our daily lives easier, but there are some challenges which are simply too difficult for current technology to handle. If experienced tax professionals can disagree over an individual scenario, if a panel of judges can disagree, if one tier of the court system can overrule another, then how is a computer algorithm with pre-defined logic meant to stand a chance?
The final nail in the coffin for CEST is the fact that even HMRC won't rely on this. When conducting their own review, HMRC will consider the facts of an engagement on balance (and not always get this right, of course) - any cases of an employer relying on the CEST tool may be useful for demonstrating best efforts being made but will not avoid a PAYE liability and interest for an incorrect decision.
So what is the solution?
Perhaps in the future with Artificial Intelligence (AI) developments then this may be possible but, for the time being, this remains science fiction. Regardless, such a development would need to be capable of doing a far more effective and consistent job than many humans who disagree over such challenges currently.
This is where the tax advisor sat on my right shoulder chirps up and points out that there can be no substitution for seeking professional advice, certainly not in more complex situations nor where the stakes are so high.
So a quick plug: get in touch if you need help with this and want to get it right.
My team at Grant Thornton includes experienced employment tax specialists, former in-house tax professionals that understand the real-world commercial issues, and former HMRC compliance officers with an understanding of HMRC's approach. We also offer a really neat all-encompassing solution - a combined status/IR35 and outsourced payroll service, to take the entire burden and risk off your hands.
More details about employment status and IR35 can be found on the Grant Thornton website: https://www.grantthornton.co.uk/en/services/tax/employer-solutions/employment-status/
0117 305 7787
After MPs expressed concerns about the potential heavy administrative burden placed on public sector bodies as they planned to implement the reform proposals, HMRC promised a simple, effective compliance solution in the form of CEST. What HMRC hadn’t considered was that no such tool could be built in such a short time frame to cover every single type of worker across the spectrum of BBC presenter, DJ, plumber, IT programmer, engineer, actor, and so on. In spite of the warnings from experts and industry stakeholders, HMRC built CEST in a matter of months, just in time to meet the April 2017 implementation of the reforms. Predictably, the result is a tool that: - Has not been tested correctly - Omits fundamental areas of employment case law - Does not align with actual IR35 legislation