Andy Vessey, Head of Tax at Kingsbridge discusses the role of automation in IR35 determinations
At the beginning of 2020 the majority of staffing companies arguably had one key topic front of mind: IR35. But the Covid-19 pandemic threw a real curveball at us all on numerous levels. For off-payroll preparations, those that felt ready were understandably frustrated that the hard work and last-minute push that had gone into plans at the end of last year and Q1 this year were no longer required until 2021.
However, the delay has resulted in a rethink among some end-hirers. In fact, in our survey of recruitment businesses, we found that over a third of their clients (35%) had made a U-turn on blanket ban approaches to PSC contractors – a move that we certainly welcomed.
Looking forward, the delayed roll out has given us all more time to prepare and rethink what was working well during original preparations and what perhaps needs to change – and the determination tools that are being used is one particular topic of conversation that has come to the fore.
Automating determinations – how valuable is the tech?
For some businesses with an extensive contractor workforce, making determinations without using technology isn’t deemed viable, so it’s perhaps no surprise that automation software – such as HMRC’s own CEST tool – was used in the run up to the original deadline. However, while our survey showed that 75% of staffing companies had been using a tech tool in some way, the determinations made by CEST in particular, did come under fire due to a number of flaws.
Originally, end-hirers had a clear preference for using HMRC’s tool which led to 31% of recruitment firms using it in the run-up to April this year, despite the staffing companies themselves being aware of its fundamental flaws. As one respondent revealed, some recruiters clearly felt they had little choice in the matter: “With so many customers guided towards CEST it felt like an unwinnable pitch to get customer confidence moving towards a better tool.” The fact that just 18% of recruiters are planning to use it for the new roll out date suggests that they have been given the time they need to educate clients on alternative tools.
It’s perhaps fair to say that the flaws in some of the determination tools and a sheer need to make a compliant decision led to so many employers taking the rather unfortunate blanket ban approach. However, the extension has provided the chance to really get it right this time around. And to do that, there needs to be a balance between the tech software that’s used and expert human intervention.
Balancing the technology with people
As is often the case with many tech developments, with IR35 determinations the tools that are being used should supplement the work by expert individuals rather than completely replace them. Where the software may be providing an “inside IR35” result, an IR35 expert should be used to make a fair and accurate determination.
The same can be said for the determination tool itself. While we need the technology to work, any software that recruiters are using ideally needs to have been designed in collaboration with an IR35 compliance expert to ensure the right questions are being asked and correct data collated. And only a person with that expert knowledge will be able to highlight where in the determination process human intervention is needed and what ‘red flags’ indicate this needs to be taken offline.
This balance is clearly in high demand in the recruitment field, with 67% of those we surveyed indicating that they would prefer a fully automated tool that provides an instant determination but has manual reviews for any indeterminate results. Our conversations with stakeholders mirrored this need for a more automated tool as recruiters, contractors and end-hirers alike continue to struggle with the inevitable delays caused by manual reviews (with huge backlogs experienced in the run-up to April 2020) and the functional limitations of most existing online tools versus recruiters’ requirements.
Ensuring you’re covered
With IR35, there are two approaches. The traditional method is to assess the contractor’s status based on the information available and then hope it is right. But this is often too simplistic. An approach that combines tech automation and manual intervention provides a more comprehensive determination and allows for any challenges to a result, changes in circumstance and, perhaps more importantly, mitigates some of the risk to recruiters.
Whatever tool or automated process you or your clients choose, though, we would urge all recruiters to ensure it’s backed by appropriate insurance. Where the recruitment firm is the fee payer, they will shoulder the potential tax risk of an IR35 determination later being challenged by HMRC. When we consider that this up-front investment is relatively low-cost when compared to the potential financial risk, it really is a no-brainer.