HMRC has announced its decision to withdraw the much-criticised IR35 Business Entity Tests (BETs) from April 2015, having established that they have been ‘used very little’, and haven’t fulfilled their intended purpose.
What are the IR35 Business Entity Tests?
The BETs were originally put in place in 2012 to help people establish the likelihood that they would be targeted for an IR35 investigation.
Unfortunately, from the outset, the tests were deemed to be ‘unfit for purpose’ by almost everyone who used them.
The scoring behind the tests was a particular target for criticism, especially when almost all participants are told that they are potential targets for an IR35 enquiry, regardless of the way they operate their contracting businesses.
After answering a series of questions, users are informed whether they have a low, medium or high chance of HMRC ‘checking whether IR35 applies to you’.
The 12 test questions include:
- Do you rent your own business premises?
- Do you need Professional Indemnity Insurance?
- Do you have a right to provide a substitute, and if yes, have you used it?
- Has your current client previously employed you on a PAYE basis?
Scores are assigned to each answer, but are heavily weighted. For example, you get 2 points for needing PI insurance, or sending out invoices before being paid, but 20 points for using a substitute within the last 2 years, and 35 points if you directly engage workers who contribute at least 25% of your turnover.
BETs to be scrapped following review
HMRC says that it has decided to scrap the tests following a review, but will still take BET results into account until the end of the 2014/15 financial year. For example, if a contractor selected for a tax review can show that they fall into the ‘low risk’ band (as determined by the tests), then HMRC will close the enquiry.
HMRC also states that where an enquiry has been closed as a result of a ‘low risk’ BET score, they won’t look into the individual’s tax affairs again for at least 3 years, assuming their circumstances don’t change (particularly the ‘working practices’ associated with a particular contract).
Updated IR35 guidance is expected to be published on the GOV.UK site shortly. You can read the current BET guidance and example scenarios here.