Where are we now? An IR35 expert’s view

HM Revenue & Customs’ new IR35 guidance for contractors was formally unveiled yesterday, Wednesday May 9th, writes IR35 Forum member and specialist on the legisaltion Kate Cottrell. At a glance, it falls into two parts – the Example Scenarios and Business Entity Tests (BETs).

The 12 BETs, and their weigthings (a summary):

• The Business Premises test – 10 points
• The PII test – 2 points
• The Efficiency test – 10 points
• The Assistance test – 35 points
• The Advertising test – 2 points
• The Previous PAYE test – minus 15 points
• The Business Plan test – 1 point
• The Repair At Own Expense test – 4 points
• The Client Risk test – 10 points
• The Billing test – 2 points
• The Right of Substitution test – 2 points
• The Actual Substitution test – 20 points

There are 12 questions in total. To take the full test, contractors should answer each point and add up the score. If the total is 20-plus points you are considered ‘low risk’. If 10-19, ‘medium risk,’ and if less than 10, ‘high risk’. 

The bumpy road of BETs

The BETs were invented by contractor group the PCG and presented to the Office of Tax Simplification as part of the Small Business Review of IR35. They were rejected by those consulted, as part of that review and by the OTS and by the government. 

The tests were then slightly amended by PCG and presented again to the IR35 Forum. I too did not support the tests while responsible for the OTS IR35 review report, seeing them not as any sort of tax simplification but as an additional layer of complexity for those affected by IR35. My view has not changed.

BETs still aren’t a sure bet

Far from unhelpful claims being implied at present, I am certainly not the only member of the IR35 Forum that holds this view. Remember, there has so far been no public support for these tests from any of the professional accountancy bodies/experts represented on the IR35 Forum, and HMRC has consulted numerous other stakeholders throughout this exercise.

Indeed, at the IR35 Forum’s latest meeting yesterday, none of those attending - only accountancy professionals, industry specialist firms and others involved in defending contractors when under investigation, did much to praise HMRC’s final IR35 business entity tests, or its scoring mechanism. 

Where we are now with IR35

The fact is that HMRC has set up three specialist teams and has already selected cases for investigation and these will start any day now. It will surely be little comfort to some who hear from HMRC in the coming weeks, but I have contributed many ideas to help improve IR35 guidance and case handling, and especially to improve the IR35 investigation process for contractors and other taxpayers.

The recent use of personal service companies by some high-profile figures, starting with Student Loans Company boss Ed Lester, has seen the focus on IR35 go mainstream. What with the IR35 consultation paper expected later this month, and the plan to put contractors in senior positions straight onto the payroll, it must be wishful thinking to believe that the process of improving the administation of IR35 was ever going to be an opportunity to change the legislation, not least because the legislation has not changed since its introduction in 2000! 

‘Extremely limited value’

That said, those contractors that take the business entity test and come out as low risk and have the evidence to prove it will benefit from the tests, in the event that they are investigated for IR35 - but only when they are investigated. The value of these tests, whatever the scoring levels, is extremely limited. If you could stand up tomorrow and say that 95% of contractors are now low risk it would make no difference whatsoever to the need for them to consider their IR35 status for each and every contract they undertake. 

That’s why these tests are a minor part of the administration of IR35 and as the IR35 legislation has not changed, failure to put in place an easy business test, cannot be seen, in my view, as a 'missed opportunity' as there was no opportunity. It is time to concentrate on helping those that will be investigated throughout the next 12 months, whatever their risk level.

Editor's Note: Further Reading - PCG response to 'Where are we now? An IR35 expert's view'