IT contracting’s use of Agile Development best practice can offer HMRC and the Office of Tax Simplification (OTS) lessons in the development of new taxation, and further insights into why IR35 was doomed to fail from the outset.
The underpinning principle of Agile Development in the software industry is to ‘build the simplest thing that could possibly work’, preventing developers from over-engineering and unnecessarily future-proofing IT systems.
Applying the same principles to the UK’s taxation system generally, and IR35 specifically, reveals that the opposite approach has been used. The result has been the creation of a system so complex even its architects are confused, let alone the taxpayers it applies to.
Agile Development best practice and taxation
The forerunner to the ‘build the simplest thing that could possibly work’ approach of Agile Development, eXtreme Programming (XP), was introduced to the IT development scene about ten years ago; ironically, at about the same time as the introduction of IR35.
The XP and Agile approaches recognise that over-engineering and unnecessarily future-proofing a system results in too much complexity. This in turn requires more maintenance, bug fixing and a generally greater likelihood of something going wrong, and of the entire system proving to be a more expensive overhead than it need be.
Another fundamental principle of Agile Development is Test-Driven Development, originally known as Test-First Programming. What this approach does is require automated tests of a new system to be developed before the system itself was created. The resulting entire program, being designed and built to be inherently testable in an automated fashion, then requires little or no human intervention.
And as the system is then tested on an ongoing basis as it is built and enhanced – known as regression testing – even additions to the original are inherently testable in an automated way. If a system has been designed so that automated tests cannot be used, then it is considered too complex and is considered unfit for purpose.
IR35 is too complex and not fit for purpose. And it is not alone.
So, how does Agile Development and automated regression testing have any bearing on UK taxation and IR35? And why would HMRC and the Office of Tax Simplification (OTS) be wise to take lessons in systems development from IT contractors?
With IR35 we have a system whose tests require an in-depth knowledge of employment law. The tens of thousands of contractors affected by IR35 don’t have a working knowledge of employment law, so can’t accurately test themselves. And the very people intended to operate UK taxation at the frontline – HMRC employees – do not have a robust enough understanding of employment law either.
The result: only experts can conduct the system tests and, even then, so complex are the system tests that even the experts regularly disagree over the results.
From a testability point of view, here is a system that is clearly complex, full of bugs and dysfunctional, and one which even experts cannot test. Not only that, but IR35 in its current form is also hugely expensive and burdensome to run, and about as far from being automated as it is possible to get.
IR35 in its current form is also hugely expensive and burdensome to run, and about as far from being automated as it is possible to get
Sadly, IR35 is not alone in this respect. The string of HMRC blunders over tax codes for the Pay As You Earn (PAYE) income tax system is symptomatic of an IT system that was not developed under test-driven conditions and is therefore throwing up bugs and maintenance issues as it operates. Even the simplest of taxation changes has the potential to end up costing individual taxpayers, and the Exchequer, dear.
Can IR35 be simplified and new taxation become ‘agile’?
Unfortunately the tests for IR35 cannot be simplified because the very foundations of this tax legislation mean it must use the same tests of employment status as are used in the wider employment law arena.
But the process of testing can be made easier; witness ContractorCalculator’s IR35 online test, free-to-use software that was developed using Test-Driven Development (TDD). If HMRC were to develop additional guidance for contractors that enabled them to test themselves, and which was rigorously policed according to those guidelines so contractors had certainty of their tax status, then it could work in a fashion until the wider tax system is overhauled.
Expecting any new tax system to be developed under test-driven Agile Development conditions might be a step too far. But it could be just what IR35 needs if HMRC is to have any chance of enforcing the legislation in the medium term, or at least until the OTS submits its recommendations for the simplification of UK taxation and future of IR35.
Will HMRC borrow from the lessons in IT and introduce "Enforcement-Driven Taxation" perhaps?