How the IR35 business test will affect contractors

Despite the setting straight of a few crucial details, such as there being six IR35 scenarios for contractors to expect and not 12, there isn’t a lot of new information in the latest IR35 Forum minutes, writes forum member Kate Cottrell, of IR35 specialists Bauer & Cottrell.

Covering two meetings (the fifth forum and a sub-meeting on 21.02.12 and 08.03.12 respectively) the minutes rightly record the focus being on the IR35 scenarios and the business entity tests. The latter, effectively HMRC’s new face for risk-assessing under IR35, was the subject of disagreement and unsuccessful attempts by a few members to introduce further tests, even right up to the last-minute.

Business entity tests

The business entity tests sole purpose is to feed into HMRC’s risk profiling system. This means that once you have been selected for an IR35 investigation and if, having taken the test, you can produce evidence to demonstrate that you would be a low-IR35-risk i.e. you are a genuine business, then this will simply speed up the IR35 investigation process.

But the business entity tests are NOT an IR35 status test and should not be used as such.  As the IR35 legislation has not changed since it was first announced by a Labour chancellor in March of 1999, those affected by IR35 still need to consider their IR35 status on a contract-by-contract basis.

Why the disagreements?

The disagreements centre upon the scoring or weighting of the tests. If too easy to pass then such a test is worthless and, equally, if too difficult the tests are also worthless. Tests that would put all contractors into the low risk category were desirable by some members but the problem has always been that those affected by IR35 come in all shapes and sizes ranging from the business-as-usual agency temp, through to the professional consultancy business. As the IR35 legislation has not changed since it was introduced in 2000, it would be naïve to think that HMRC could come out with a set of tests to put everyone at low risk. Disagreement was bound to arise if the ‘one-size-fits-all’ approach is taken. 

Where are we now?

The business entity tests have always been a minor part of the process to improve the administration of IR35 and all the other areas have now been addressed e.g. helpline, guidance, dedicated specialist teams and data-mining exercises are underway to select cases for review. The IR35 scenarios and business test will go live on HMRC’s website in April 2012, next month. So a lot of work has been achieved over the last 12 months. The new processes will be tested over the next 12 months.

Is this good news for contractors?

Undoubtedly those contractors running a genuine business will be able to see that they are not an IR35 review target. And those with little understanding of IR35 will also be better served thanks to improved guidance, as will those subject to investigation because they should see their cases settled quickly. There is little good news for those that have been ignoring IR35, as the Office of Tax Simplification has warned all along.

New rules

With the extensive lobbying by some to abolish IR35, and the recent revelations of numerous high-profile individuals operating through personal service companies, IR35 has never been so much in the spotlight as it is today. Indeed, the government’s announcement in the Budget of the impending consultation on office holders and those considered controlling persons and integral to the running of an organisation to have PAYE/NIC deducted at source, shows clearly that the government certainly does not agree with the ‘one-size-fits-all’ approach.

Wednesday 28th March 2012