IR35 business test signals more confusion for contractors

The taxman’s eagerly awaited scoring mechanism for his IR35 ‘in business’ test is unfortunately likely to give rise to confusion and dispute, much in the same way as the Employment Status Indicator tool for the construction industry has, writes Martyn Valentine, a director of IR35 advisory The Law Place.

So by this time next week, and not too dissimilar to the simplistic terrorist warning system in place in the US, contractors confronting IR35 will have the opportunity to shoehorn themselves into a prescribed category – low risk, medium risk or high risk.

No silver bullet coming

Despite some support for the IR35 business entity test, and the IR35 scenarios, the only method (other than involving HMRC) that can provide much-needed certainty for a contractor unsure about their employment status is for the contract to be professionally reviewed. If appropriate, the contract can also be amended prior to the start of the engagement in order to reflect the actual working practices, although such amending is often overlooked as a way to mitigate an individual’s exposure to the rule.

Then, the contractor's position can be reinforced by obtaining witness evidence from the end-client, but only once the engagement has been completed. This evidence would be admissible to the Tax Chamber.

AWR holds clues to the ‘new’ IR35

Outside of these specifics, which won’t change because the legislation isn’t changing (even when the IR35 test and scenarios go live on HMRC’s website), the government's thinking on contractors, more generally, is apparent. Or at the least, it can be inferred from the definition of an agency worker in the Agency Worker Regulations.

My reasoning here is straightforward: the regulations do not apply in respect of a limited company where the end-client is a business client of the limited company contractor. This is substantially the 'in business' test which is at the heart of the ‘new’ IR35. Given our professional experience in defending contractors from claims of ‘disguised employment’, this is suggestive of only high-level contractors who are engaged to deliver a specific service, potentially on a 'one off' basis, similar to a solicitor undertaking conveyancing or an accountant preparing year-end accounts for a client.

Danger for contractors covering for permies

In practice this is not always clear-cut, of course, because contractors often provide services within the scope of a large project, such as Solvency II. With more certainty, I can say that any contractor covering for an end-client's employee faces considerable difficulties which, unless its website buckles under the sheer weight of PSCs all jostling to self-assess their exposure to IR35, HMRC are going to make as plain as day within a week.

Editor’s Note: CUK understands that HMRC’s new IR35 processes will be announced on its website on Monday; we are checking with multiple sources who expect the IR35 test and IR35 scenarios to be formally unveiled then, on April 30^th. UPDATE: The announcement is expected on May 7th, or the week commencing.