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HMRC abolishes IR35 Business Entity Tests
29 October 14 | By: Jas Jhooty
Earlier on this week HMRC announced that they are abandoning the use of their much criticised Business Entity Tests to determine IR35 status with effect from April 2015.
The main reason is that in nearly all circumstances, a Personal Service Company (PSC) using these tests would be referred to the HMRC contract review service who would invariably deem that IR35 should apply.
IR35 forum criticism
This practice was severely criticised in the July 2014 meeting of the IR35 forum who said that the Business Entity Tests were being misused by HMRC and that they were not fit for purpose. This has led to the announcement this week that they were being withdrawn.
So in the absence of the Business Entity Tests what steps should you take to safeguard yourself from falling foul of IR35 legislation?
IR35 considerations
Generally IR35 obligations will arise if the worker of the PSC would be considered to be an employee of the ‘end-user client’ if it wasn’t for the ‘intermediary’ structure. If so, the PSC will be obliged to operate PAYE and NIC on virtually all of the income derived from the contract. Whilst IR35 obligations only directly apply to the PSC, they also indirectly affect the hiring company in the form of demands for increased payment rates from a PSC who has fallen foul of IR35 legislation and the potential for the worker to claim employment rights (e.g. Holiday pay, etc.)
To safeguard against this, both the contract for the provision of the PSC’s services and what actually happens in practice should be reviewed. For example consideration should be given to the following areas: -
- Right of substitution – While this is referred to in many contracts, does it actually happen in practice? Also how much control does the hirer have on who the substitute can be?
- Contract Terminology – It is extremely easy to refer to PSC workers using common employee terms e.g. Personnel. This practice can prove to be very unhelpful by casting an inaccurate light on what actually happens in practice when HMRC come to review the contract.
- Payment terms – It is very common for PSC’s to be paid by the hour and to claim expenses on the same terms as other employees. Such terms may make it difficult to argue that IR35 should not apply.
- Control – References to how and where the work is undertaken can be strong indicators towards the contract being within the IR35 regime.
- Etc.
How emTax can help
The above list is not exhaustive. There are many other factors that also have to be considered when weighing up an engagement’s potential to fall foul of IR35 (e.g. the provision of equipment, the business risk element of the contract, how long the contract goes on for etc.)
No single factor determines whether IR35 is to apply or not. Instead it a combination of all of the pertinent factors that have to be assessed as a whole. Concerned PSCs and hirers should take steps to be able to paint a picture to HMRC that IR35 should not apply.
Similarly no off-the-shelf contract exists that is guaranteed to be IR35-proof. Our consultants are well versed in all of the nuances of IR35 legislation and can advise on how to safeguard both the PSC and the hiring organisation by reviewing and improving existing contracts and practices.
Our consultants are all ex-HMRC Employer Compliance Inspectors and also have many years of experience of working as senior managers within the “Big 4” accountancy firms. The only difference between our employment tax advisory service and that which the “Big 4” offers is that our fees are a small fraction of what they charge.
If you want to know more on how we can help you to strengthen your existing PSC contracts & procedures, please do not hesitate to contact us by ringing 0345 548 3680.