IR35 - the rise of the machine?

Much has been written recently about the liabilities sought by HMRC from various government departments for not operating IR35 correctly under the rules for public sector employers.?Commentators have criticised HMRC’s status tool (CEST) as not being fit for purpose and warned that private sector employers should learn from the mistakes made by the public bodies concerned and steer clear of using CEST.?But is this fair?

?I may be one of the few tax specialists to say that I don’t think the criticism is fair.??CEST, when used properly can be helpful to a taxpayer.?Don’t get me wrong, I’m no great advocate of CEST, but I do think it has a role to play.?In my view, the main risk in using CEST (or any other status determination tool for that matter) is that it is possible to place too much reliance on a tool’s outputs and not enough reliance on what might just be the best tool at your disposal – the human brain!

?Employment status is a very complex area and it isn’t standing still.?New case law comes along frequently and often changes the emphasis on key tests.?The changing nature of modern working also means that even some well-established status tests, such as control, personal service and mutuality of obligation, need to be viewed against latest working practices not just those in play when the precedent was set.

?The danger of just using a tool to consider status is that it has no ability to step back from the detail and consider if the decision it has reached sounds sensible.?That is where the human involvement comes in.?HMRC’s own manual quotes from one of the key employment status cases (Hall v Lorimer) where Nolan L.J. said “… having obtained all the relevant information, the object is to stand back and determine employment status on the basis of an overall view. It is not just a question of adding up the relevant factors for and against a particular employment status. Rather what you have to do is make a subjective judgment based on your overall assessment taking account of the different weights which apply to individual factors in the particular case.”

?Is it any surprise therefore that a tool that is only ever designed to score the answers to its own questions will come up with an answer which a human, taking the overall view, could disagree with?

?Does this mean that you should never use CEST or any other tool? ?No, but I strongly advise you to ensure that any process you have in place also involves a suitably qualified and experienced human being to stand back from the detail and ask whether a) the answer it provides makes sense and b) would it stand up to challenge??If the answer to either of these points is no, go back to basics and assess the worker against the case precedents, maybe using the details contained in the tool – but don’t restrict yourself to only considering the questions posed by the tool or what is written in the contract.

?Over the years, I’ve learned not to be surprised when a new piece of information is introduced which turns the answer on its head and that information would not have been forthcoming if I’d stuck only to the standard questions contained in a typical employment status checklist/tool.

?We may never know the full detail behind the work done by the public bodies in coming to what HMRC subsequently considered to be the wrong decision, but it appears that an unhealthy reliance was placed on the results obtained from CEST.

?The old adage about a bad workman blaming his tools applies equally to employment status.?If you rely only on an automated tool without relevant and experienced human input, don’t be surprised if you end up with the overall result you didn’t want – HMRC challenge, large liabilities, penalties, professional defence fees and reputational damage.

BDO have a dedicated hub for all things IR35 – read more here.’