Taxman readies IR35 scenarios, business test

The taxman will soon unveil six ‘IR35 scenarios’ – not the 12 initially expected, alongside an ‘IR35 business test’ that personal service company contractors can in future use to self-assess their exposure to the rule.

Reflecting on the latest minutes of the IR35 Forum, Her Majesty’s Revenue & Customs said the members were due to finalise the two new processes for PSCs, so details could be published on its website from next month.

The business test, which officials confirmed would initially be only a trial, is designed to determine the level of risk posed to the personal service company in terms of an “HMRC intervention”, and involves a series of questions.

Dependant on the answers given to the questions, the taxpayer will receive either a plus or minus scoring for each which, when totalled, will help them establish whether their PSC is deemed a high, medium or low risk under IR35.

The forum’s development of the test, which drew “broad consensus” on its wording, follows HMRC’s announcement that IR35 risk assessment should move “away from considering each individual contract,” to focus instead on the “business entity”- the PSC.

But to the taxpayer trying to self-assess themselves under the legislation, the IR35 scenarios incoming to HMRC’s website are likely to be read first, or at least before they take the business test, explained IR35 Forum member Kate Cottrell.

“Much like the IR35 case studies put out by HMRC on its website in 2000, the scenarios are for guidance only and will help in the same way when contractors come to self-assess.

“So,” she said, outlining the likely steps in a formulaic way to CUK, “[choose the most befitting] scenario, + HMRC guidance, then + your high, medium or low risk score total = your risk of IR35 investigation.”  

Out of the 17 scenarios that have been explored, the forum agreed with HMRC on 14 of them – yet only six are due to be disclosed for taxpayers to use. Publishing a greater number “would cause confusion rather then [sic] providing clarity,” HMRC said.

Seb Maley, of IR35 specialists Qdos Consulting preferred: “HMRC will not provide an exhaustive number of scenarios as they cannot divulge their full risk assessment criteria.

“If they did, then contractors would simply organise their affairs accordingly and everyone would ensure that they sat outside the legislation, regardless of whether they were genuinely outside or not.”

Asked about the likely content of the scenarios, Mr Maley said he expected that they might be intentionally “broad,” so that they cover “commonplace situations” of PSC working, which often involves a recruitment agency.

At the same time though, the scenarios will be sufficiently detailed to provide guidance for an individual contractor to “make a judgement call as to whether they are high, medium or low risk,” the advisor hoped.

In line with his expectations, HMRC stated that none of the IR35 scenarios to be published were sector-specific. In fact, according to the forum’s minutes, two are instances of being inside; two are outside, one is split (as in the JLJ case) and one is a ‘grey’ area (where the forum and HMRC couldn’t agree).

Last night, an IR35 Forum member headed off claims that the latter (disputed) scenario was suggestive of conflict between the Revenue and forum members, who include some of the tax authority’s most vocal critics, such as the PCG, REC and FCSA.

“HMRC simply got the ball rolling [on the scenarios] and it has highlighted where there is agreement and disagreement – but most cases [out of the 17 explored] were agreed with the Revenue,” the member claimed.

Asked about the IR35 scenarios on the eve of last week’s Budget, an HMRC spokesman is yet to respond but Ms Cottrell, an ex-Revenue official who attended the forum’s meeting, said of their implications for contractors: “The scenarios won’t really be related to risk.

“The risk aspect is about how HMRC view you and whether you are a high, medium or low target for an IR35 investigation. The downside for contractors is likely to be finding out that you are at a greater risk of investigation than you previously thought.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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