Contractors' Questions: Should we cheer HMRC's IR35 business entity test?

Contractor’s Question: How is the taxman’s compliance risk process likely to change when Revenue & Customs reveals new tools and ‘simplifications’ in relation to its administration of IR35? Are contractors and their advisors welcoming of the anticipated unveiling on HMRC’s website, which is widely expected to include an IR35 ‘test’ with questions about being a ‘business entity’?

Expert’s Answer: HMRC has for many years stated within their guidance that employment status is determined by assessing the contractual terms of an engagement, which we, as specialist advisors on IR35 status disputes, agree is correct.

In terms of compliance risk, the IR35 Forum recently disclosed that HMRC has agreed to move away from assessing each individual contract and developing a ‘business entity test’ instead.

Development in case law has not moved away from the fundamental factors which need to be considered, when determining status. It is clear, that it is the contractual terms that need to be considered when determining status. In reality, the terms of each contract that a limited company contractor engages in will vary, so clearly a one-size-fits-all test may not be the conclusion to simplify matters.

The question is, will this new testing measure give limited company contractors a reasonable degree of certainty, or will it simply add a layer of additional complication to the already complex array of employment status tests that have been developed over the years by the courts? Only time will tell, but we’ve not long to wait as HMRC is expected to reveal all later this month.

The expert was Neeta Vaja nee Vaitha of Accountax Consulting, a leading advisor on IR35 and employment status.

Wednesday 11th April 2012