RIP Business Entity Tests

The 'IR35' rules which became law in the Finance Act 2000 were designed to prevent the avoidance of tax and national insurance contributions through the use of personal service companies and partnerships.

The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so.  

The major issue with IR35 is much the same as most tax laws, lack of clarity. The result is that it allows HMRC to almost make up the rules as they go along and it takes a knowledgeable and tenacious adviser to stop what can become a runaway train. The lack of clarity can often only be determined by appealing the matter to the Tax Tribunals or higher Courts. 

One of the ways in which HMRC have recently tried to determine whether or not the IR35 rules apply is by the use of Business Entity Tests (BETs) which were introduced in 2012. The points based system is used to risk assess whether a particular arrangement is caught by the rules. In some respects this was a reasoned attempt to put some clarity into IR35, unfortunately if failed by concentrating on the wrong areas. 

In simplest terms IR35 is purely a status review to determine whether the relationship is genuinely self employed. HMRC’s first effort was the Status Indicator Tool. Initially this asked three key questions on substitution rights. If you answered these correctly then you were considered low risk. However, if you didn’t there was a number of other sensible questions but no matter how you answered them you always came out as at risk. 

The BET was similarly flawed as it concentrated on matters that have not been key when cases have gone before the Courts. For example “does the business own or rent a business property” and the client risk question which focuses purely on bad debt experience both rate 10 points. Yet the questions “does the business have the right to send a substitute”, one of the trinity of key factors established as long ago as 1968, only ranks for 2 points. 

The IR35 Forum has recently reviewed the approach to administering IR35 and found that the BETs were not helpful to businesses as they were used very little and were not fulfilling their intended purpose.As a result the review recommended withdrawing the BETs. Fortunately, HMRC have accepted this recommendation and will withdraw the BETs from 6 April 2015. Until then, businesses can continue to take the BETs if they wish or are asked to do so as part of a tendering process. 

Quite why we have to wait until April 2015 when it has been proved the test is not fit for purpose is beyond belief. We have worked with specialists for a number of years and they have helped us in establishing a detailed questionnaire based on the contractual termes under which you operate. The questionnaire is weighted in the same way HMRC tried with BET, but thequestions cover the issues correctly in accordance with the law and legal precedents.For a contract review please contact us.