In late October, HMRC confirmed that it is to scrap IR35 Business Entity Tests as of the end of this tax year. On its website, Revenues has admitted that the tests have been found to be both “used very little” and “not fulfilling their intended purpose”. So, what does this mean for contractors and the SMEs that use them?
What are the tests?
IR35 has been in effect since 2000. The legislation was set up to ensure that certain contractors are taxed in the same way as if they were employees. In 2012, HMRC rolled out Business Entity Tests so that companies could assess themselves against their risks of IR35.
Answers to questions are assessed on a point-by-point basis, with a conclusion being reached at the end on whether the business was at a low, medium or high risk. Businesses are quizzed on such matters as their efficiency, and whether or not they are over-reliant on individual members of staff.
Were they worthwhile?
Supporters of IR35 point out the necessity of making sure that two people doing the same job for the same company are taxed in the same way. For example, it should not be in a business’ or individual’s interest to terminate their contract as an employee and continue working for the company as a contractor, just to benefit from favourable tax. It’s a simple enough argument to understand.
As far as BETs are concerned, however, their low usage probably reflects the fact that many SMEs found them to be unwieldy. Simon McVicker of IPSE, an association of self-employed workers, recently branded them as “badly designed, poorly scored, and misused from the outset”. Indeed, a 2012 overhaul of the tests left many professionals underwhelmed at the fact that little seemed to change from the original guidance.
What’s the next step?
HMRC has said that companies wishing or asked to complete BETs may still do so for the rest of this tax year, but the tests will not be taken into consideration for any IR35 enquiries on or after April 6, 2015.
HMRC has stated that more information about the change will appear on Gov.uk in due course. In the meantime, contractors and companies still in the dark about whether they or their contractors should be applicable to IR35 tax could benefit from consulting an outsourced accounting service for small business and contractors, which will be able to advise and point them in the right direction.