Business Entity Tests Face Opposition

The purpose of the IR35 Forum was ultimately to result in ‘better administration’ of IR35, in answer to George Osborne’s commitment to the same in his 2011 budget speech. So one can only assume that the recently introduced “IR35 Business Entity Tests” are the first step in this process. In reality though, it seems the sole purpose or the Entity Tests is to feed into HMRC’s risk profiling system and that it is doing genuine contractors no good.

Opposition to Business Entity Tests

There has been much talk since the tests went live at the beginning of the month, with some saying this simply adds an additional layer of complexity to an already complex system and others convinced that even more genuine contractors will have to unnecessarily undergo lengthy and expensive IR35 investigations.

Concerns have also been raised that the so-called solution to a much-hated, confusing and wasteful system is a 12-month “Test & Learn” strategy which is just going to cause further delays in finding a workable system.

“The test is not really a solution at all,” says Pieter Carstens from 1st Contact Umbrella. “It doesn’t change or affect current IR35 legislation in any way and it doesn’t do anything towards simplifying the solution or finding a more realistic way to identify “disguised employees”. All it’s really doing is showing how HMRC views you as a contractor, in terms of risk.”

Test Questions could Identify Most as “High Risk”

The test consists of 12 questions, each carrying a unique weighting (from minus 15 to 35 points). Contractors who score 21 points or more are designated as ‘low risk’, while those who score 11 to 20 points are deemed ‘medium risk’ and those who score 0 to 10 points are identified as ‘high risk’.

The question: “Does your business engage one or more workers who generate at least 25% of your business turnover annually?” can put you right out of the high risk zone with its 35 points if you are one of the few contractors who have employees, while questions such as “Were you previously a PAYE employee for the client you are now contracting for in the last financial year?” will count as minus 15 points and put you right back in the danger zone.

If your business has invested over £1,200 on advertising, excluding entertainment in the last 12 months, (surely a sign of a genuine business?) you will score a mere 2 points!

Umbrella a Possible Solution

“As the test currently stands, it seems that most contractors working through Limited Companies will end up in the medium to high risk zone and be in danger of an HMRC IR35 investigation,” says Carstens. “One possible solution for those who don’t want to risk a long and stressful investigation would be join an Umbrella Company. That way, they would automatically be free of any IR35 issues.”

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