HM Revenue & Customs (HMRC) has launched a business entity test on their website, which consists of twelve questions that attempt to assess a contractors ‘risk’ as to whether they fall foul of IR35 legislation.
Firstly, what is IR35?
IR35 was legislation brought in by the Government on 6th April 2000 to try and distinguish between “disguised employees” and genuine contracting companies, as they were concerned about the hiring of individuals through their own service companies so that they could exploit the financial advantages offered by a corporate structure.
There are a number of factors that need to be considered when deciding whether a particular contract falls foul of the IR35 legislation. They include, but are not limited to, what is known as ‘The Holy Trinity’ case law;
- Control – is the company able to work under its own control or is its method of working dictated by the direct supervision and instruction of the contracted agency or end user/client?
- Substitution – does the company’s contract mention a specific individual who must carry out the contract on behalf of the company (normally referred to as the “relevant consultant”) or does the company have the right and would actually be able to substitute individuals as it deems fit?
- Mutuality of Obligation – does the company have to accept work offered by the agency, end user or client or can it “pick and choose” the work it wants to carry out? In addition, is the agency, end user or client obliged to offer the company work?
So what does the business entity test mean for the contractor?
Creating a generic test for contractors to complete in order to establish whether a contract falls foul of IR35 legislation is not substantial enough. This process requires a lot more preparation, thought and expertise than this.
Contractors need to have their personalised contract reviewed on a contract by contract basis by an IR35 specialist, preferable a firm of accountants who are PCG accredited who have gone through the necessary comprehensive training.
A specialist would be aware of ‘The Holy Trinity’ IR35 case law, as mentioned above. By HMRC encouraging contractors to complete the business entity test, they are effectively creating the law, not enforcing the legislation – which is their main duty.
Why has the IR35 test come about now?
Since the introduction of IR35 in April 2000, the legislation has arguably not generated the intended revenue that it was brought into raise. HMRC are therefore under great pressure from the Government to keep enforcing the legislation until this happens.
Having now seen the 12 business entity tests, it is very clear that they are designed with the sole purpose of scaremongering contractors in to treating their contracts as being trapped by IR35.
The answers given to each test provide a score as an indication as to how risky a contract might be in terms of an HMRC review rather than being an accurate guide to the status of a contract under IR35.
What is the potential impact for contractors?
The questions may not reflect the true position of the case law that has been established over time, giving conflicting messages to the contractor rather than educating them on what IR35 legislation is.
The test is scaremongering contractors and, as a result, thousands of people could lose out on significant amounts of money by not assessing their contracts accurately:
“I think that by HMRC is going to scare or even intimate people into thinking that an IR35 friendly contract would actually fall foul of the legislation. Therefore this could influence the contractor into accounting for their contract using the IR35 legislation and potentially result in them losing significant sums of money.”
Louise Williamson, Partner, Meades Contractors LLP
There are numerous different ways to word clauses within contracts. That is why specialists have to review them on a case by case basis; this is also why generic questions will fail.
For example: The same question asked to two different contractors with identical contracts may result in different outcomes because one contractor may interpret the question in a totally different way to someone else because it’s subjective.
The legislation IR35 specialists refer to is not subjective as it’s based on case law and precedence. This emphasises the importance of contractors contacting a specialist if they want their contract reviewed.
What are your thoughts on HMRC creating a generic test? If you are a contractor, do you think you would consider the outcome of a generic test or would you go to an IR35 specialist? We’d love to hear your thoughts!