HMRC agrees to drop Business Entity Tests

A prediction to ContractorUK that the taxman would abandon his Business Entity Tests following criticism of them by the IR35 Forum yesterday rang true.

In an update to its website on Monday, HM Revenue & Customs said it accepted the recommendation of the upcoming IR35 Review, and the Forum, that BETs should be scrapped.

Designed to let PSC contractors self-assess their risk to an IR35 enquiry, the tests are to be pulled from April 6th 2015, as they are not being used as intended and are “used very little,” HMRC said.

John Hill of employment status firm John Hill & Associates is one of the many IR35 advisers who has “never used” the BETs, nor has he ever advocated their use to his clients.

“I am only surprised that it has taken this long for HMRC to withdraw them,” he told ContractorUK yesterday.

“They were never really fit for purpose as they were non-statutory, not in accordance with case law and generally naive in construction.”

He added: “They were never intended as an indicator of IR35 status, only the risk of an HMRC enquiry and, unwelcome though an enquiry is, the only fundamental issue is whether or not IR35 applies.”

Unlike Mr Hill, Qdos Consulting’s Andy Vessey isn’t surprised, though he too thinks the odds seem to have been stacked against the BETs from the start.   

The employment status consultant told CUK: “Following the IR35 Forum's last meeting it was just a matter of ‘when’ this announcement would be made not ‘if.’ BETs received a fair amount of criticism from the day they were conceived… and with justification.”

However, external members of the IR35 Forum pushed for the tests on the eve of their introduction in May 2012, as a way to reduce the uncertainty of the legislation for PSCs.

Mr Vessey, a former tax inspector reflected: “It is easy to be critical of HMRC, but they did at least attempt to provide something that assisted contractors in self-assessing their IR35-risk”.

Contractor trade body IPSE takes a similar stance. Although it is “pleased” that BETs (and the accompanying IR35 Scenarios) will be defunct from April 6, it remains sympathetic to them as an idea.

“The BETs had the potential to bring real clarity to independent professionals working through their own limited companies,” the body said. “Instead the tests were badly designed, poorly scored, and misused from the outset”.

IPSE’s Simon McVicker explained that far from helping limited company contractors, as was HMRC’s objective, the BETs left such workers facing “more uncertainty, not less.”

“Especially in the public sector,” he added. “[Organisations have been] wrongly using them to assess the tax status of contractors… [but all] businesses and the public sector must now stop using the BETs.”

Speaking earlier this month, IR35 Forum member Kate Cottrell warned that a world without BETs would see a “pressing need for some up-to-date guidance” for public sector end-users, who are meant to use the tests as part of the assurance process.

Qdos’ Andy Vessey reflected last night: “Having now decided to scrap BETs, HMRC with the help of the Forum must come up with something that substantially improves upon them.

“Adapting the ESI tool for IR35 has been mooted which I would be in favour of, but only if it included realistic questions that helped a freelancer gauge their true risk from IR35.

“The solution needs to be a balanced, objective and fair one, particularly if it is going to be used to provide assurances to the public sector.”

HMRC says it has “no plans to replace the BETs,” yet in line with the alerts by the advisers it plans to “shortly publish” new guidance, which may clarify the processes for public sector contractors and their clients.

The tax authority also reassured that if it has previously closed an IR35 enquiry based on a ‘low risk’ result from the BETs, then its officials will not open another enquiry within the next three years, as previously committed to.

But such a result is rare, if not unheard of. “I have handled a good number of the 'new style' IR35 enquiries and not once did any of my clients manage to hit a score over 20, thereby demonstrating what a ‘fait accompli’ BETs are,” said Mr Vessey.

Similarly, Mr Hill said: “I have concluded three IR35 enquiries in the last few months where HMRC has agreed that IR35 did not apply, but the BETs would have put each contractor in the ‘high risk’ category.”

So contractors will likely welcome the removal of the tests, which comes  “not before time,” according to IPSE’s chief executive Chris Bryce. The group trumpeted: “[The] flawed HMRC tests [are] finally scrapped… [they] have proved to be unfit for purpose.”

Oct 28, 2014