IR35 business entity tests published

HMRC has begun the process of overhauling its operation of the IR35 regime for personal services companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated.

The overhaul will mean an increase in IR35 investigations, the tax department confirmed.

As expected following leaks last month, the 12 business entity tests set out in HMRC’s 47-page intermediaries legislation guidance note are illustrated by six example scenarios. HMRC said the tests are designed to build up a picture of how a contractor’s business works and how they provide their services. The testss include:

  • Business premises test  - Does the business own or rent business premises separately from the contractor’s home or end client’s premises? 
  • PII test - Does the contractor need professional indemnity insurance? 
  • Efficiency test - Has the business had the opportunity in the past two years to increase its revenue by working more efficiently?
  • Assistance test - Does the business employ any workers who bring in at least 25% of the yearly turnover?
  • Advertising test - Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising
  • Previous PAYE test - During the past year, has the end client engaged you with no major changes to your working arrangements
  • Business plan test - Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account?
  • Repair at own expense test - Would the business have to bear the cost of rectifying any mistakes?
  • Client risk test - During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover?
  • Billing test - Does the business invoice for work carried out before being paid and negotiate payment terms?
  • Right of substitution test - Does the business have the right to send a substitute?
  • Actual substitution test - Has the business hired anyone in the previous two years to do the work it has taken on?

The HMRC guide explains that the tests are not set in stone, and are an extension of the risk-based approach to extends to all of its investigations.

Paul Mason, manager of the contractors division at investigations insurance specialist Abbeytax, met with HMRC officials this week to discuss the new tests. “HMRC’s new approach hasn’t changed a great deal,” he told AccountingWEB.

“They already undertake risk assessments of who is most likely for investigation. The business entity tests are something you can use to self-assess to see how you score by their internal rating. But they aren’t telling us what the detailed risk criteria are because of the fear people will arrange their affairs accordingly.”

As every other adviser or specialist in this field would agree, Mason added that the business entity tests are just a diagnostic tool. The actual application of IR35 will always come down to employment status factors that must be tested against case law going back to the 1968 Ready Mixed Concrete decision.

But along with the new guidance, Mason did learn that HMRC is drawing together specialist IR35 teams at offices in Salford, Edinburgh and Croydon to pilot the new approach to investigations. The objective of the exercise will be to address the risk of avoidance of employment taxes, including National Insurance, according to HMRC. “This will mean that there will be an increase of the number of investigations opened for IR35 reasons over the coming year and subsequent years,” a spokesman confirmed to AccountingWEB.

Continued...

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John Stokdyk's picture

PCG: "HMRC reform still lacks clarity"

John Stokdyk | | Permalink

Hot on the heels of the new HMRC guidance on the IR35 business entity tests came a statement from the PCG in which chairman Chris Bryce complained, “HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35.  While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed.”

More detail on the business entity tests and the full PCG statement are available in our IR35 reform discussion group.

is it 1st April?....this is a joke...

justsotax | | Permalink

isn't it?!

 

That scoring system is crazy....you incur the cost of a mistake (that no employee ever does (well except for getting the sack) and you get credit for 4 points?.....you have PI (which no employee ever has you get 2 points.  You work from home (which a number of small businesses do.....and you are effectively penalised and get '0' points.....weird!

Locutus's picture

Not really based on case law    2 thanks

Locutus | | Permalink

Not surprisingly the "tests" are heavily skewed in HMRC's favour, and not really based on any case law that I have seen.  HMRC making up the law again?

The control test (whilst not always as relevant for highly skilled professionals) seems to have been completely ignored altogether.

Mutuality of obligation doesn't seem to have really been addressed either.

It seems strange that if a personal service company pays another employee / subcontractor to do work that generates say 20% of turnover then that counts for nothing.  Surely if an employee / subcontractor generates any of the turnover then it means that particular contract is not one of service (employment) but for services (self employment).

"Real" businesses are also expected to lose at least 10% of their turnover as bad debts and must have contracts that change radically after a year.  Where on earth did these tests come from?

I suspect that 95% of personal service companies will be regarded as "high risk".  How does that help either HMRC or the personal service companies themselves?  As is currently the case, I expect HMRC to lose the vast majority of "high risk" cases that go before the Tax Tribunals.

Microsoft!

Mike Carter | | Permalink

How would Bill Gates fare on this when he was first working with IBM?

Previous PAYE test is bizarre. Many IT projects take more than a year. Many clients like to negotiate terms and let them run over different projects - it's good business sense. Can you imagine going into Mc Donalds and them saying "Sorry you cannot buy a Big Mac unless you also buy a Fillet O Fish this month because it's more efficient for us this way.

If The City cut rates and you take it does that earn 0 or -35 points?

Renting office space is madness. When needed it can be rented by the hour or the day on many business parks. Have HMRC heard of hot-desking? Many firms rent less office space than they nominally need.

andrewdiver's picture

IR35 Risk assessment not application

andrewdiver | | Permalink

These guidelines are for risk assessment not establishment of application.  In themselves the do not determine whether IR35 will apply. As 0103953 states those will be based upon case law.  
The question to most is how will they find these high risk companies among the many that file PAYE end of year documentation. These current ask does IR35 apply, for even a medium risk they might be stating no, because the criteria still doesn't fit.  Will the P35 declaration change next year to Low, Medium & High rather than yes/no?  

Once they have identified these companies, proof of a low risk is apparently sufficient to make them go away.  We will see if it that easy.

-Has it changed? I am not sure.
-Are they closer to pulling more businesses into the realms of IR35? I don't really think so unless they intend in raising IR35 enquiries en-masse to any company with 1 or 2 directors.   This in itself feels like a monumental task.  
-Will they target known industries where these IR35 contractors are likely to roam and approach these through the larger customer/end user? Do they have the rights & powers to do so? 
-Are they hoping these documents push taxpayers to correctly appraise and self-assess liability to IR35 and come forward? I suspect like numerous other disclosure opportunities there will be very poor returns in this field.

They still seem like they are clutching at straws and until they start winning some tribunal cases enforcing IR35 I don't think contractors will be too concerned by these announcements. 

R these tests being currently applied to HMG's 2,000 workers ...    2 thanks

dstickl | | Permalink

ARE these tests being currently applied to HMG's 2,000 NPW's [Non Payroll workers] as identified by Danny Alexander's letter to George Osborne, etc?

IF not, THEN can any one out there EITHER please persuasively explain why not OR tell us when the HMG 2,000 NPW's will be tested as described?

accountsdragon's picture

Does this mean they are doing more checks?    1 thanks

accountsdragon | | Permalink

I seem to remember posts on this topic a while ago mentioning just 7 'investigations' in one year.  Is this still the case, or have they started doing more?  Or, is it just raising publicity so that more people come forward? As andrewdriver says, how will HMRC know who to look for?

@andrewdriver....the worry about this

justsotax | | Permalink

is that they are 'guidelines'....presumably to help identify what are or are not IR35 businesses.....but the guidelines as mentioned appear to be no more than what the HMRC consider to be their preferred view on a selected number of criteria which they wish to measure.  (so not very useful guidelines then).  

 

It seems to be just another way of getting individuals to think they fall within IR35, having used what they perceive as official guidance on the subject.....

frustratedwithhmrc's picture

Since there has been no legislative change...    1 thanks

frustratedwithhmrc | | Permalink

diannepayne wrote:

I seem to remember posts on this topic a while ago mentioning just 7 'investigations' in one year.  Is this still the case, or have they started doing more?  Or, is it just raising publicity so that more people come forward? As andrewdriver says, how will HMRC know who to look for?

This is just HMRC providing more weight / guidance to their position that the vast majority of one-man-band & husband-and-wife limited companies are actually 'disguised employment' and should be either paying purely PAYE or operating IR35.

Since there has been no substantive change in either the legislation or the interpretation by the courts / tribunals this has no additional legal or statutory basis.

My recommendation is to make clients aware of the tool, but also point out that this viewpoint is biased towards finding people in 'disguised self employment' as opposed to 'self employment' and as such should be treated with a large degree of skepticism.

I regularly point out that there is already a substantial amount of legal precident on this specific matter and that of the investigations and cases undertaken by PCG against HMRC the score is PCG 1498 versus HMRC 10.

This is not to say that IR35 can be ignored, because it exists for a genuine purpose with regard to the original problem of Friday-to-Monday contractors.

However, in most circumstances provided the business is setup correctly, its contracts specific about being one of 'contract for services' and contracts are reflected in ACTUAL BUSINESS PRACTICE then the risk of HMRC winning a case under IR35 is minimized (it is never zero).

This position should be confirmed with specific legal advice (IR35 Contract reviews by an independent tax specialist) and supported by tax investigation insurance.

If you feel (as many of us do) that you are not sufficiently competent to advise your client on these matters, you should have an explicit written and signed acknowledgement from them of the risks and acceptance that the burden of remaining compliant outside IR35 remains with the client.

The reason that HMRC rarely undertakes specific investigations is that they have lost so often and so publicly that they are now only proceeding where the taxpayer is unrepresented / uninsured or where they have a cast-iron case against the taxpayer.

It would be interesting to know how many opening letters HMRC sends out requesting further 'clarification' on IR35 issues result in the investigation being immediately dropped when the 'clarification' is responded by AbbeyTax or one of the PCG appointed tax specialists.

I suspect the number is probably quite large, but not known outside HMRC for the sake of political embarassment.

 

John Stokdyk's picture

@dianepayne - Yes to more checks

John Stokdyk | | Permalink

I've just updated the article with comments from HMRC confirming the new approach will mean an increase in investigations.

frustratedwithhmrc's picture

HMRC confirmed new approach will increase investigations

frustratedwithhmrc | | Permalink

John Stokdyk wrote:

I've just updated the article with comments from HMRC confirming the new approach will mean an increase in investigations.

Which given that nothing else has changed will mean more HM Tax Inspectors chasing legitimate businesses for taxes, penalties and interest which do not raise net revenue (given the costs) rather than pursuing actual evaders.

What a waste.

John Stokdyk's picture

"Missed opportunity" - PKF

John Stokdyk | | Permalink

 

Yesterday’s long-awaited guidance is unlikely to tackle the problem of IR35 abuse, warns PKF Accountants & business advisers, according to Philip Fisher, head of employment tax and rewards at PKF.

He sent out a note commenting: “The Government has once again ducked the opportunity to address the serious issue of personal service companies merely issuing some risk profiling measures that may be seen as threatening by many.

“The weightings given to each test at the moment are flawed. For example, meeting the 25% ‘assistance (income from employees) test’ alone will mean that HMRC regards your company as low risk. However, if you only generate 24% of income from such employees you might automatically be at high risk.

“Regardless of the scoring, unless HMRC puts considerable resources behind the three new teams that are due to be created to focus on IR35 issues or introduces sophisticated information gathering systems, publishing its risk analysis techniques serves no purpose.”

frustratedwithhmrc's picture

The purpose of these tests is obvious...    4 thanks

frustratedwithhmrc | | Permalink

 

John Stokdyk wrote:

“Regardless of the scoring, unless HMRC puts considerable resources behind the three new teams that are due to be created to focus on IR35 issues or introduces sophisticated information gathering systems, publishing its risk analysis techniques serves no purpose.”

The purpose of these tests is obvious, to try to attempt to build concensus and support around HMRC's position; a position which has been regularly rejected by tax tribunals and courts throughout England and Wales; a position which has been untenable since IR35 was placed upon the statute books.

Time and again, IR35 has been found to be flawed in both theory AND practice. Yet, HMRC continues to regurgitate this rubbish, to attempt to transform it into a workable mechanism for tax collection.

Only a government department, shielded from the economics of the real world, could continue to waste many millions of pounds of UK taxpayers money in a vain attempt to squeeze blood from a stone.

I would have more respect for HMRC if they simply acknowledged to their political masters what most of us can already see; that IR35 is (and always has been) unworkable and that the costs of attempting to enforce it are far in excess of the revenues raised.

I seem to remember a few years back that it was costing £1.35 for every £1.00 of revenue raised from IR35, although I am unsure of the provenance of this figures.

It is time this wasteful stupidity was brought to an end.

Bingo!

ThornyIssues | | Permalink

0103953 wrote:

I suspect that 95% of personal service companies will be regarded as "high risk".  How does that help either HMRC or the personal service companies themselves?  As is currently the case, I expect HMRC to lose the vast majority of "high risk" cases that go before the Tax Tribunals.

Bingo! HMRC never had an inclination to do anything constructive with IR35 and in fact, the Ed Lester et al fiascos handed them "persuasion on a plate" that helped convince the Emperor in Number 11 that his clothes are indeed, the best. HMRC has ignored all but one on the IR35 Forum (one being fully IR35 on-side from the outset) and ignored additional "real-world" business tests that the externals proposed then scored their tests to cause as much uncertainty as possible so that their usual modus operandi based on guilty until you can prove your innocence at tribunal is perpetuated.

I expect that the advice from the professionals will be to go directly to tribunal, as long as the contractor has all well known IR35 ducks in a row. I also hope that the "scores on the doors", including the cost to the taxpayer is well publicised becuase based on existing FoI figures and 95% wins at tribunal by the PCG, the cost will far outweigh the "avoided" tax. 

 

These are clearly written by

NeilW | | Permalink

These are clearly written by people who have never ever run a service business. 10 points if you rent an office and then this:

"Does the business have the right to send a substitute? (2 points if yes)"

That is and always has been a 100% killer in case law. Employment *requires* personal service. If you can delegate work to anybody you choose then that is the end of the matter. 

The only time it can be defeated is if the employer is essentially given a choice of employees and *they* get to pick. 

 

Why are HMRC persisting with this policy of trying to frighten people? 

 

 

"This is not to say that IR35    1 thanks

NeilW | | Permalink

"This is not to say that IR35 can be ignored, because it exists for a genuine purpose with regard to the original problem of Friday-to-Monday contractors."

 

And that only exists because of the crazy differential in taxation between employees and the self-employed, and the fact that employers can continue to avoid the responsibilities of employment in this way.

 

If the tax burden was placed on the end client, then 'Friday to Monday' would stop overnight (or at worse over the weekend :)

 

 

Friday-to-Monday should not be an issue

ThornyIssues | | Permalink

NeilW wrote:

"This is not to say that IR35 can be ignored, because it exists for a genuine purpose with regard to the original problem of Friday-to-Monday contractors."

And that only exists because of the crazy differential in taxation between employees and the self-employed, and the fact that employers can continue to avoid the responsibilities of employment in this way.

If the tax burden was placed on the end client, then 'Friday to Monday' would stop overnight (or at worse over the weekend :)

If HMRC could not "deem" employee status for tax purposes, IR35 would go away. If there was a true right to be self-employed, there would be no issue with Friday-to-Monday as on the Friday you ended a contract of employment and on Monday, you entered a mutually agreed, reciprocal contract for services. No quibble - end of - no matter how many contracts and/or intermediaries. As long as the SE business affairs are met, there should be no issue.   

 

frustratedwithhmrc's picture

I remember the original proposals which transformed into IR35    1 thanks

frustratedwithhmrc | | Permalink

NeilW wrote:

If the tax burden was placed on the end client, then 'Friday to Monday' would stop overnight (or at worse over the weekend :)

Indeed - this was exactly how IR35 was originally drafted.

However, the various massive companies that employed one-man-band limited company subcontractors lobbied hard to have the risk transferred from them to the subcontractors. By doing so, IR35 was broken before it ever even hit the statute books.

The IR35 horse is long dead and moldering in the grave, yet HMRC continues to flog it. As the saying goes, doing the same thing time and again, but expecting different results is the definition of insanity.

Barking

The Black Knight | | Permalink

Office in a sign written van = 10 points  +2more

Don't get paid for 1.2 month dispute.= 10 points

make efficiency savings 1.2 months = 10 points

package ..mass market...and charge a percentage.= Humberella Heaven

Nothing about number of clients ?

 

 

 

quite

ireallyshouldkn... | | Permalink

NeilW wrote:

"This is not to say that IR35 can be ignored, because it exists for a genuine purpose with regard to the original problem of Friday-to-Monday contractors."

 

And that only exists because of the crazy differential in taxation between employees and the self-employed, and the fact that employers can continue to avoid the responsibilities of employment in this way.

 

If the tax burden was placed on the end client, then 'Friday to Monday' would stop overnight (or at worse over the weekend :)

 

 

 

This is the only sensible answer to the problem.

The tests are very very odd, in essence rent an office and stick a substitution clause in and its out of the danger zone, even if you are contracted to a single entity for 10 years?

I wonder who thought that spending £1,200

justsotax | | Permalink

on advertising indicates that you are self employed.  Where as clearly as an employee you may only spend £600......bizarre!

frustratedwithhmrc's picture

Nope - You are missing one of the points

frustratedwithhmrc | | Permalink

ireallyshouldknowthisbut wrote:

The tests are very very odd, in essence rent an office and stick a substitution clause in and its out of the danger zone, even if you are contracted to a single entity for 10 years?

Previous PAYE test - During the past year, has the end client engaged you with no major changes to your working arrangements (Minus 35 points if yes)

Hit that one and you are stuffed before you start because of the minus 35 points.

What is this QI? (BBC TV Quiz Show)

Why no control test?

gsgordon | | Permalink

Perhaps there should be a test something like -

"Do you control the work of employees of the company you are contracted to? If yes, minus 100 points."

Not likely since it would upset HMRC's employers!

Guidance notes page 20 says minus 15 points    1 thanks

hedleyg | | Permalink

In the IR35 Guidance notes, the previous PAYE test scores minus 15

Whereas if the lobbying groups had just kept quiet ...

mikewhit | | Permalink

...it would all have faded into the woodwork !

frustratedwithhmrc's picture

It's like some Kafkaesque nightmare...

frustratedwithhmrc | | Permalink

mikewhit wrote:

...it would all have faded into the woodwork !

Whose lobbyists? HMRC? Big Business? PCG?

They all have conflicting goals and the only winners are the lobbied (primarily MP's).

I just scored myself and I

ireallyshouldkn... | | Permalink

I just scored myself and I get 18 points.

What about other criteria, no longer mentioned

mfwiniberg | | Permalink

For example:

supplying goods to your clients at a profit.

providing your own equipment and running costs etc to do the work

working for multiple clients and controlling the hours you work for them

charging by time worked etc

working for clients without a contract verbal or written

On the above guidance, I score badly because I work from home, I employ my wife (MAAT qualified) as the company accountant, and I pay some (but not all) of the company's income out as dividends. Despite that I have operated in this way for over 30 years and never once been investigated.

I also noticed that the latest on-line submission system asks about 'service' companies, enquiring if the main income is derived from the work of one person (yes) who is 'contracted' to another company - AHA no!, because I work for multiple clients and have NO contracts. So I could legitimately answer that my company was not a service company...

The whole thing is such a mess, surely HRMC have better things to do?

And what about the senior public servants who have been avoiding tax/NI by paying themselves through such 'service' companies - have any of them had an IR35 investigation? Why not? Perhaps some of them work for HMRC?

Mike

 

 

frustratedwithhmrc's picture

There is a reason that these are no longer mentioned by HMRC    1 thanks

frustratedwithhmrc | | Permalink

mfwiniberg wrote:

supplying goods to your clients at a profit.

providing your own equipment and running costs etc to do the work

working for multiple clients and controlling the hours you work for them

charging by time worked etc

working for clients without a contract verbal or written

There is a reason that these are no longer mentioned by HMRC. This is that HMRC have an irritating habit of losing tribunal hearings and court cases when these things are mentioned.

These new and improved tests ignore economic reality, which is a bit like attempting to ignore gravity. You can do it for a while, but at some point gravity notices and pulls you crashing down to earth.

While HMRC continues to inhabit its fantasy dream-world of risk profiles and online tests they will continue to lose case-after-case to those lawyers and tax attorneys whose feet is firmly bedded in the reality of law and legal precedent.

Meanwhile, we are all paying for this HMRC fantasy and the real evaders are running around laughing at HMRC's stupidity.

I can't express how angry this makes me.

Tests

mfwiniberg | | Permalink

Hmm,

perhaps this

"working for clients without a contract verbal or written"

requires a little clarification, because in law I suspect a contract would be deemed to exist if, for example, someone approached me to undertake a task (such as virus removal) on their machine  - something I might do for a fixed fee. I think such client would be flabbergasted to now find that they are my employer though (under the employment laws), and I'd like to see HMRC prove it. Be marvellous though wouldn't it - after all, if I became ill whilst doing this 1 hour, fixed fee contract for a few quid, they might have to pay me statutory sick pay for weeks. What about if my wife was pregnant - would they be liable for my paternity leave?

What a joke!

Makes my blood boil too!

 

KH's picture

HELP! I score only 7 !!!!

KH | | Permalink

Hey man, am I shaking in my boots! Yep, sure am, since according to this list I score 7 .. so I am very high risk. Now how daft can you get? OK, so I know the rules don't apply to accountants, but all the same.........

Where are the scores for:

1. numbers of clients (150 odd)

2. owner taking all the profit/loss (especially the losses)

3. spending as much time as I wish on each and every project

4. working only those hours in the day I wish to work (OK, let's leave out January, which can be a wee bit hectic)

5. taking holidays of whatever length I like whenever I wish

6. funding all the running costs of the business (from stationery & stamps to equipment & council tax), etc, etc, etc,.......

This is the craziest set of guidelines and scoring I have ever seen. But then, what hey! I don't work for HMRC .......... maybe the answer lies in that last little phrase.

hear hear

The Black Knight | | Permalink

frustratedwithhmrc wrote:

mfwiniberg wrote:

supplying goods to your clients at a profit.

providing your own equipment and running costs etc to do the work

working for multiple clients and controlling the hours you work for them

charging by time worked etc

working for clients without a contract verbal or written

There is a reason that these are no longer mentioned by HMRC. This is that HMRC have an irritating habit of losing tribunal hearings and court cases when these things are mentioned.

These new and improved tests ignore economic reality, which is a bit like attempting to ignore gravity. You can do it for a while, but at some point gravity notices and pulls you crashing down to earth.

While HMRC continues to inhabit its fantasy dream-world of risk profiles and online tests they will continue to lose case-after-case to those lawyers and tax attorneys whose feet is firmly bedded in the reality of law and legal precedent.

Meanwhile, we are all paying for this HMRC fantasy and the real evaders are running around laughing at HMRC's stupidity.

I can't express how angry this makes me.

It's a waste of everybody's time and energy, if its not IR 35 it becomes Umbrella or dodgy expense claims or even trade as a ltd then strike off = no tax we have the same thing with CIS every tom dick and harry is self employed and large numbers completely ignore the CIS rules.HMRC would increase its take if it concentrated on evasion and cash in hand jobs.There are some huge tax losses out there easily provable. Perhaps the sensible thing to do is a more realistic points system giving weighting to certain items in certain industries/sectors so a definately in or out, but the middle ground is still arguable which is what we have to do anyway. In most cases the client nods and confirms that he is the cheapest option and no please don't review it or you can't see the contract that matters anyway.

Divorced from IR35 reality    1 thanks

davechaplin | | Permalink

As many people have indicated, the business entity tests are divorced from the realities of IR35 case law. It misses many factors that are key to IR35 - MOO, Control, and so on.

So, we have a test that is incomplete, with weird weightings, not based on IR35 case law, yet with a conclusion that implies someone is at risk of an IR35 investigation. Go figure!

As the tests currently stand you could replace them all with one question: Are you a service company? If yes, then you are caught. Or, the amusing alternative to ask contractors... Do you have two heads? No! Oh, you are probably caught then, hand over your money to Hector.

The whole concept of a "disguised employee" has always been ridiculous. People should have the freedom to contract, without HMRC stepping in telling them that they have decided they are something else because it doesn't suit them.

23 June 2010 ...    1 thanks

mikewhit | | Permalink

"IR35 will be abolished, Small Business Minister Mark Prisk confirmed in an interview with Richard Tyler in today’s Daily Telegraph. "

 

From http://www.contractorcalculator.co.uk/ir35_abolished_business_minister_m...

thanks Mike

The Black Knight | | Permalink

I wonder what's coming instead.

ill timed release from hmrc then?

frustratedwithhmrc's picture

I wouldn't get your hopes up.

frustratedwithhmrc | | Permalink

The Black Knight wrote:

I wonder what's coming instead.

ill timed release from hmrc then?

I wouldn't get your hopes up. That news item was published on 23rd June 2010, just after the coalition was elected.

Since then - nothing of any significance has happened.

.

accountright | | Permalink

frustratedwithhmrc wrote:

The Black Knight wrote:

I wonder what's coming instead.

ill timed release from hmrc then?

I wouldn't get your hopes up. That news item was published on 23rd June 2010, just after the coalition was elected.

Since then - nothing of any significance has happened.

 

......something to fit the new criteria / tests?

 

Polly

John Stokdyk's picture

Thanks @hedleyg - PAYE minus score corrected in text

John Stokdyk | | Permalink

Mistake was a typing error on my part - many apologies if this has led anyone astray today.

The text has been corrected. If only I could say the same about some of the tests.

However, the word I am getting from those in the know, such as Kate Cottrell and John Whiting, is that the risk-based approach and published tests may offer a degree of comfort to contractors who are safely outside the IR35 investigation criteria. They are also suggesting seeing how the pilot operation of the new approach works and lobbying at the appropriate time for further changes to the scheme.

I'll post more about this once I've written up my interview notes from John.

IR35

Ninian | | Permalink

Reading HMRC's approach to IR35 is like a mixture of 1984 and the press releases of the old communist regimes i.e ignore the unpalatable bits and make up the rest to suit the cause. It has long been obvious that HMRC try to pretend MOO doesn't exist since case law says that employment cannot be where there is MOO. Substitution (2pts!!!!) is also being sidelined by the look of it since that is another matchwinner. Bring on the tribunals.

Ways to escape IR35

Psyche | | Permalink

So it appears that in advising clients on how to avoid IR35 under the new points system, the following actions could be taken:

- Form a two-person limited company, with two contractors (each with a separate class of shares for dividends) who are each earning approximately 50% of the fee income -- thus passing the assistance test.

- Rent time-shared office space to pass the business premises test.

- Get the client to agree to accept a substitute for one day every two years, thus passing the actual substitution test.

Any other ideas?

frustratedwithhmrc's picture

Look out for the small print on this one

frustratedwithhmrc | | Permalink

Psyche wrote:

So it appears that in advising clients on how to avoid IR35 under the new points system, the following actions could be taken:

- Form a two-person limited company, with two contractors (each with a separate class of shares for dividends) who are each earning approximately 50% of the fee income -- thus passing the assistance test.

- Rent time-shared office space to pass the business premises test.

- Get the client to agree to accept a substitute for one day every two years, thus passing the actual substitution test.

Any other ideas?

I strongly suspect the small print on this will be extensive, particularly:

1. Two-person company - Easy to do in theory, harder in practice due to varying income from each person, different cost basis, dividend distribution (alphabet shares)?, etc.

2. Business Premises Test - Expect HMRC to define the "Business Premises" to exclude hotdesk and time-based office rentals.

3. Substitution - Difficult to agree the substitution test during initial contract negotiations, possible after extensive working with the client though.

Given HMRC's previous form on IR35, I would expect their interpretation of these rules to be based upon conditions that are set idiotically high, are completely unrealistic or more likely meaningless.

If we play HMRC's game we'll just end up advising clients to do stupid or meaningless activities for no benefit to either the client or ourselves.

 

 

 

Locutus's picture

If you follow the logic HMRC have adopted ...    1 thanks

Locutus | | Permalink

If you follow the logic HMRC have adopted for personal service companies then surely if your Schedule D self employed plumber gets a low score then he / she is not really self employed ... so you the customer ought to be setting up a payroll scheme every time you want your burst pipe fixed!!!

The Courts / Tax Tribunals will see through all this nonsense. Accountingweb, the PCG, etc should run a "how low can you go" competition to find out what is the the lowest score that a personal service company can get on the HMRC tests and STILL win in the Courts / Tax Tribunals. I suspect it would be well into negative territory!

I still can't get my head around HMRC's bizarre conclusion that ACTUALLY making a substitution gives you 20 points (should be more like 1,000) when the Courts have always decided that if there is a GENUINE right to substitution then the contract CANNOT be one of service, so consequently IR35 cannot apply.

HMGs NPWs

chicken farmer | | Permalink

No, if, like Ed lester, they are office-holders, they are slap bang within PAYE anyway - IR35 doesn't come into it. The question which should be asked is are the Revenue pursuing these people for the under-deductions? They have, after all, knowingly received emoluments from which the employer has wifully failed to deduct tax and NI.

Not just personal service companies...

dhalsey | | Permalink

Well, according to this points system, we have a £1million turnover insurance company who are "medium risk". They operate from a home office, don't lose 10% of income, don't use substitutes and don't need PII and the director was employed previously. Needless to say, they're about as far removed from IR35 as could possibly be. They now rent office space and have 20 employees. Still medium risk?

As previous commenters have noted, these tests ignore case law, so HMRC can make up tests until it's blue in the face, but if they target a business who scores highly in its test, they will only then look at it and think, "ah, the Tribunal will throw this one out".

Seriously though, have HMRC got the resources for all this? RTI coming in, pension reform for employers, this points test that should ensure 95% of all PSCs go across their desks....

Appeasement never works.

NeilW | | Permalink

Appeasement never works.

That the chancellor has refused to amend the law, and instead has set attack dogs in motion again is entirely the problem. The law is unworkable and needs scrapping.

There is far too much 'striving to make it work', when the simple and fair solution is to put the risk onto the clients. If you treat your contractors like employees, then that is what you will get.

 

 

 

 

 

Point of order

ThornyIssues | | Permalink

chicken farmer wrote:

No, if, like Ed lester, they are office-holders, they are slap bang within PAYE anyway - IR35 doesn't come into it. The question which should be asked is are the Revenue pursuing these people for the under-deductions? They have, after all, knowingly received emoluments from which the employer has wifully failed to deduct tax and NI.

You are misinformed and believe the hype. On an IR35 level, Mr Lester did nothing illegal or wrong. It is perfectly legal for a person in his position to operate via a LtdCo and invoice for his services. The only issue with Mr Lester was the pension arrangements.

 

"All but one of the forum members"

Kate Cottrell | | Permalink

Just to put the record straight here the list of members of the IR35 Forum are as follows: Chartered Institute of Taxation
Institute of Chartered Accountants in England and Wales, Federation of Small Business, Freelancer & Contractor Services Association, Professional Contractors Group, Recruitment and Employment Confederation, The Association of Professional Staffing Companies, Kate Cottrell - IR35 Specialist, Anne Redston - IR35 Specialist, Association of Chartered Certified Accountants. Scores of other external stakeholders were consulted too and many took part in IR35 Forum meetings that are not on this list. To date we have had a public statement from 5 people claiming to represent the majority.

R these tests being applied to HMG's 2000 workers    1 thanks

karen.morriscook | | Permalink

Well said. Exactly what I said when I heard about the letter.

@KateCottrell: Please support "Contractor's Age test: Is C>SPA?"    1 thanks

dstickl | | Permalink

Hi Kate Cottrell!   May I politely request - when you attend the next HMRC IR35 Forum meeting - that you please ask the HMRC team members to introduce an additional / new IR35 Business Entity Test question, to those already published, of the form:

*  "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".

Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes); as, for your easy reference, I previously set out in this AWEB link:-

http://www.accountingweb.co.uk/anyanswers/question/ir35-2#comment-558692

Here are some rationales to support a  "Contractor's Age test", for consideration:

(1) IF HMRC really does support the Chancellor's Budget 2012 for growth, THEN surely it's better that people over State Pension Age (SPA) are in work, creating economic activity for the UK's economy, rather than on the street or buses, or causing extra public expenditure through pre-mature dementia/altsheimers/etc and associated NHS or care home costs.

(2) Haven't the necessary contributions needed by the state already been paid by and for such OAP workers, through the NIC records?

(3) Don't the advances in computerisation since the post WW2 introduction of the NIC scheme mean that employers can now efficiently distinguish between workers aged below and above SPA?  

(4) With the intellectual/skills capital of workers > SPA, isn't it sensible to unleash same, especially as an ageing population demands sufficient workers, and immigration is now discouraged by HMG due to the costs of congestion, etc?

Impartiality

ThornyIssues | | Permalink

Kate Cottrell wrote:
Just to put the record straight here the list of members of the IR35 Forum are as follows: Chartered Institute of Taxation Institute of Chartered Accountants in England and Wales, Federation of Small Business, Freelancer & Contractor Services Association, Professional Contractors Group, Recruitment and Employment Confederation, The Association of Professional Staffing Companies, Kate Cottrell - IR35 Specialist, Anne Redston - IR35 Specialist, Association of Chartered Certified Accountants. Scores of other external stakeholders were consulted too and many took part in IR35 Forum meetings that are not on this list. To date we have had a public statement from 5 people claiming to represent the majority.

I think that as the OTS undertook separate evidence consultations around the country with PCG, FSB and "agency" members that they probably have the right to say that they speak for the greatest number of those affected by IR35 and who represent not for profit organisations. To that end, perhaps you can comment on the PCG press release regarding your comments on Shout99 and ContractorUK, where you tout for IR35 business and which states :-

Finally, it is extremely disappointing that Ms Cottrell concludes that the new measures 'cannot be seen [...] as a missed opportunity, as there was no opportunity'. It is clear to PCG and presumably to every other member of the IR35 forum that the formation of the forum presented a clear opportunity to improve the way IR35 works. Indeed the Forum’s purpose, in its own words, is to 'advise on improvements in the administration of IR35'.

If Ms Cottrell does not believe this is an opportunity to improve IR35 then it brings into question her true motivations for taking a seat on the IR35 Forum. Ms Cottrell’s business of reviewing contracts to test their IR35 compliance may make her knowledgeable about the subject, but it also appears to have impaired her ability to commit to improving IR35.
 

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