Focus group say Business Entity Tests should be scrapped
The very late publication of the minutes of the meeting of the IR35 Forum held on 7th May has revealed that a focus group of independent advisers has recommended that the Business Entity Tests (BETs) should be done away with. This follows concerns that BETs are being used incorrectly in the public sector.
The focus group also considered that the six scenarios, contained in HMRC’s May 2012 guidance to help contractors decide on their IR35 status, were not helpful and it would be more desirable to have a summary of case law.
Contracts
HMRC moved to dispel concerns that contracts can confer status, by confirming that actual working practices are king in deciding if someone is employed or self-employed.
IR35 awareness and publicity
Increasing awareness about IR35 has run into a slight snag – there is no budget!
Some smaller accountancy firms apparently do not fully understand IR35 and the Forum believes these are a key, yet hard, group to reach, as they are often the contact for new contractors.
HMRC affirmed that they would much rather provide taxpayers with the tools to understand the IR35 legislation rather than having to undertake investigations to put it right later. Perhaps the department should provide crystal clear guidance then and while they are at it an overhaul of the legislation!
Enquiry process
According to HMRC, they have received positive feedback on the consistency of their approach during IR35 enquiries and that they were more transparent about the information they needed and focused on the key issues. The Revenue are keen to continue to improve and will look to address the following areas:
- Maintaining openness and consistency;
- Being clear about the reasons for continuing the enquiry;
- Ensuring that the agency and the PSC are kept informed; and
- Managing delays to ensure that the enquiry does not lose its momentum.
As ever, HMRC maintained that the enquiry time can be shortened where they are able to meet with the contractor. Other Forum members suggested that resistance to meetings could be reduced if the Revenue were to:
- Provide a clear agenda, possibly with questions, at the point they request a meeting; and
- Make a decision at the end of a meeting. According to HMRC however, all officers are empowered to make such decisions but unless it was very clear cut then they are likely to want to consider the answers they have received during the meeting rather than making an on the spot decision.
HMRC helpline and contract review service
To persuade more freelancers to use the contract review service, it was suggested that HMRC provide a caveated opinion where the contractor does not have all the contracts and does not want the Revenue approaching the end client. Whilst HMRC said that they would be happy to do this they warned that this would not be something that a freelancer could rely on in the event of an enquiry in the same way they can when a full contract review is undertaken.
Future of the IR35 Forum
It was confirmed that the Forum will still be in existence after the general election.
Another meeting of the Forum took place in July, so we might see the Minutes at Christmas!
Say I’m a freelancer who set up a consultancy with 3 contractor mates of mine to look more professional and share costs of marketing. No premises as we are required to work at client sites due to data protection / security issues. We take on 2 graduates as contractors to train up and help one of our clients. They don’t bring in 25% of revenue due to the rate differences. We haven’t managed to get invoices unpaid valued at 10% of turnover (what a stupid test!) We have an unused right of substitution in the contracts. We don’t advertise as we find work find the work through previous contacts, referrals and job sites. We are still seen as medium risk – ie might not be a business. That’s despite there being 6 people involved and turnover approaching half a million.
A real scenario: I used the tests on a guy who did my life insurance who works in a similar fashion. Different associates are all owner/directors and specialise in life, income protection, wills etc. Their business is still high risk, despite having thousands of satisfied customers. They got 2 extra points for advertising. HMRC presumably wouldn’t use the test on them due to the nature of selling to many clients. But it shows that a business that is obviously a business wouldn’t pass the test.
Therefore the tests are invalid and not fit for purpose.
Requiring premises, customers who haven’t paid you, additional fee earning employees, or a substitution are not valid means of testing if you are a real business. Without 1 of those you will be medium or high risk.
Totally agree that the requirement to have Bad Debts is stupid – but turning that around the other way, in the event of a customer insolvency the contractor is an unsecured creditor – very unlike an employee who is a preferential creditor, and very likely to be paid.
As #1 says, most of these are very silly tests. You have to wonder what the PCG reps do in these meetings – in the first series of IR35 Forum meetings the PCG actually proposed these BET tests as an alternative to repealing IR35 (Which is what their membership expected them to do, since that had always been their position and the position of the vast majority of their members.
They then allowed the nonsense that they are now to be enacted. Worse, they allowed the report to the Chancellor to include a key fallacy, that “contractors are broadly taxed as per employees”.
Er… sorry, but show me an employee that effectively pays their own Employers NI?
It looks like they’ve been intimidated (looking at the vast number of HMRC people in the room, no doubt meetings held in swanky offices designed to intimidate)… and/or the PCG are just like all the others who have a vested interest in IR35 continuing.
Getting rid of these useless tests would be good, but it does not recover the massive opportunity that the PCG lost in the IR35 Forums when this government came to power.
One other thing to challenge on IR35.
It’s been a while since I read the actual legislation, but I don’t remember anything that says that the working arrangements are paramount. This appears to be something HMRC dreamed up and there’s nothing in case law that shows that any judge has ever agreed with them – at least, not in any legally binding way in case law terms.
There is a clear problem with this approach. Any worker entering into a contract expects that the arrangements will be as per the contract T&Cs, but they don’t necessarily have a massive degree of control over large organisations and ow they deal with these matters. If someone starts work and finds that there’s a slight problem with, say, a bit too much “direction and control” then what are they expected to do – make a fuss and risk losing the work? Walk out? Cancel the contract?
It would be completely nuts for a country to have legislation that expects anyone to need to do that, just to maintain some entirely artificial employment statuses that someone dreamed up a couple of centuries ago – and that they still defend to the death, failing to notice that they simply do not work.
When you set out to tax different groups of workers at different levels, you need to be able to define which workers are in which groups. They have serially failed to do that. They have fallen back on a series of observations that are not true of the workers they wish to hit hardest, but are true of SOME other business (have more than one client, have their own premises, have headed stationery, have bad debts).
All of this is completely artificial. Observing things about a plumber that are not true of, say, an engineering contractor is only useful if you really, really want to tax the engineer heavily – and leave the door open to allowing some other group to escape (such as lawyers, professional footballers).
The entire system becomes entirely subjective, simply down to a view taken by HMRC and little to do with statutory law as enacted by Parliament.
This needs to be challenged, but there is no-one fighting the cause for the underlying problems with the basic premise(s) on which our laws in this area are predicated.