HMRC’s proposed ‘test & learn’ strategy for its new IR35-related business entity tests will read like children’s fiction unless the taxman takes the grown-up approach and benchmarks and measures.
The taxman is proposing to monitor the effectiveness of HMRC’s new business entity tests and IR35 risk scenarios with what they are calling a ‘test and learn’ strategy over 12 months. However, without effective benchmarking from the outset and ongoing, accurate measurement, any evaluation of how effective IR35’s new administration is working is likely to read like a ‘Jack and Jill’ story – and be of as much use.
The new tests have come out of the IR35 Forum, which was set up with the specific aim of ensuring the “better administration” of IR35. So, to be able to judge whether that better administration is happening, it should be provable using proper measures.
Those of us used to working in any kind of process-driven service or production environment will be familiar with using continuous feedback loops to measure performance and identify and implement process improvements. The technique has various labels, but most contractors will recognise the term Continuous Improvement Process, or ‘CIP’.
The idea of a CIP is that you measure where you are at the start, your benchmark, and set out what you hope to achieve with at least one tangible objective, such as, ‘I want this to go X% faster’, or ‘I want this to consume X% less energy’. To have any meaning, the measures must be quantifiable and, ideally, externally verifiable to demonstrate progress, so ‘go faster’ and ‘less energy’ must be clearly defined.
It would be virtually impossible to argue that this approach shouldn’t be taken with something as important yet loosely defined as “the better administration of IR35”. So, has HMRC chosen to us a CIP technique? Apparently not.
Instead, HMRC is calling its strategy to measure improvements in IR35’s administration a ‘test and learn’ strategy. Unfortunately, this kind of self-styled approach could mean anything and, quite possibly, nothing at all.
In his 2011 Budget, Chancellor George Osborne committed to the better administration of IR35. But how will we know that the new business entity tests and IR35 risk scenarios represent better administration, or a process improvement, unless the current situation has been benchmarked and the ongoing future process is being measured?
If HMRC called ‘test and learn’ what it should be – a CIP – then we would expect to see formal objectives, measures and timescales that can be externally verified. HMRC would be explicit about what exactly it plans to improve and the parameters it will measure to provide data on progress. That, at the very least, is what the non-HMRC members of the IR35 Forum have a right to expect. And it’s certainly what we taxpayers should see, because it’s our money being invested – or wasted – in these new tests.
A formal CIP with defined measures would provide proof to the Chancellor, contractors, taxpayers and other stakeholders that the process of administering IR35 is indeed better. Measures could be taken monthly and be something like: number of businesses contacted, number of businesses in each category, number of cases taken to investigation, % of cases taken to investigation and won, numbers in court, hours spent, additional tax take, return on investment, and so on.
Instead, HMRC offers us its ‘Jack and Jill’ storyline, ‘test and learn’, with no apparent benchmarking and measurement framework, no objectives and no accountability to external stakeholders, and only minimal accountability to the IR35 Forum. And, despite the Forum’s breadth of expertise and insight into taxation and contracting, HMRC has already demonstrated it pays scant attention to Forum members with opposing views.
HMRC can access a huge range of process improvement tools and strategies widely used, tried and tested in industry. By openly adopting globally recognised process improvement practices to better administer IR35, HMRC has the opportunity to win respect and credibility. But the story so far is children’s fiction, and that’s not going to take any of us grown-ups to our ‘happy places’.