How has the contracting world reacted to HMRC’s business entity tests?

The contracting world has been crying out for some time for greater clarity concerning IR35.

Determining one’s status under the legislation has proven particularly difficult and many contractors who believe they are outside IR35 may in fact be inside it. Given that contractors need to know their status so they can fill in their personal tax returns correctly, confusion over the subject is a serious matter.

To help address the issue, HMRC recently revealed its IR35 business entity test, designed to be a diagnostic tool to help contractors check their compliance with the legislation and ascertain which risk band they fall into.

So, is the business entity test the answer to contractors’ prayers?

According to the Professional Contractors Group, the answer is no.

The body feels that the tests, rather than bringing much-needed clarity and simplicity, will have the opposite effect.

Along with the Association of Professional Staffing Companies and other external bodies on the IR35 Forum, the PCG believes that the guidance issued by HMRC fails to incorporate key points raised by the bodies to improve the administration of IR35.

They accept that better-trained teams and quicker decision making will be beneficial however the key development of the business entity test is disappointing.

The issues raised by these organisations surround the nature of the questions that make up the tests, the scoring system in place and the way the tests will be used.

On the scoring, the forum members believe the distribution of points is not only unfair but also fails to reflect the realities of how businesses operate.

The scoring system will have the effect of pushing a disproportionate number of companies into the high-risk category, meaning those cases that are genuinely high risk will be difficult to identify.

APSCo’s chief executive officer Ann Swain said that HMRC has been reluctant to take advice from experts on how to make the tests fit for purpose.

Chris Bryce, chairman at the PCG, called HMRC’s approach “risk-averse” and lamented the lack of courage and commitment to improve the administration of IR35.

The next 12 months will be the ‘test and learn phase’ for the business entity test with HMRC and the IR35 Forum monitoring the reaction to them and seeing whether or not they will prove beneficial.

Initial reaction has been hostile with many feeling that the tests simply make a complex piece of legislation even more difficult to understand.

IR35 Forum members have vowed to continue fighting to improve the situation for contractors however it remains to be seen whether the authorities will embrace suggestions made by the body.

Going forward, it is important that you speak with an accountancy services provider about having your contracts and working practices reviewed to see whether they fall inside or outside IR35.

Many such companies will provide a detailed breakdown of whether the assignment falls inside or outside IR35 and the basis of that conclusion.

If your assignment is deemed to fall inside the legislation, accountancy services providers are able to advise you on the best way forward.

You will have to pay for the service however given the consequences of failing to comply with IR35, it could prove to be money well spent.