One-off opinions and contributions from accountancy's great and good.
IR35 reform: A case of unrealistic expectations
As a member of the IR35 Forum, Kate Cottrell had a ringside seat as the new business entity tests were devised. Here is her analysis of the latest episode in the IR35 saga.
Unlike many contractors and accountants, I do not feel deflated by the publication of the business entity tests and the guidance, as they are a starting point in a pilot exercise over the next 12 months. At the end of this period there could be higher or lower scores for the tests or the tests could be withdrawn in their entirety.
But I am frustrated by the emphasis many people are putting on the business entity tests as the key part of this exercise. The tests are a minor part of the improvements to the administration of IR35, but are being blown out of all proportion by some. Some are treating them as an IR35 status test, which of course they are not.
I did not support these tests when the PCG presented them to the OTS following their change in stance from calling for IR35 to be abolished. The suggested tests were not supported by the OTS or the government. The PCG amended them and presented them again to HMRC via the IR35 Forum.
I still think that they add an additional layer of complexity to IR35, which is most unhelpful. But those who come out of them with low risk scores will at least have the opportunity to demonstrate their ‘in business’ characteristics so that HMRC will close their review as soon as possible.
Chancellor said at last year’s Budget that he would keep IR35 and improve its administration. The whole process has never been an opportunity to change the law as the law has not changed! There are those who want an easy business test, but the reality is that if 95% of contractors find themselves at “low risk” of an IR35 investigation, it makes no difference whatsoever to the need for them to consider their IR35 status for each and every contract they undertake.
This latest chapter in the IR35 story has resulted in a worse situation for contractors as inevitably any new process has to be tested and the only way it can be tested is by opening investigations.
Figures obtained from HMRC under the Freedom of Information Act showed that there have been any IR35 investigations for the past few years: 25 in 2008/09; 12 in 2009/10; and 23 in 2010/11. Many many people were able to ignore IR35 because the likelihood of being picked up was so slight.
But with the new approach, HMRC has put in place the specialist teams of approximately 36 people who will be tasked with doing looking into IR35 cases.
A few years ago I wrote an article about IR35 reform called, “Be careful what you wish for” and it seems that this has come true!
Kate Cottrell is a founder of specialist IR35 advisers Bauer & Cottrell, who have extensive experience reviewing IR35 contracts and working practices. She is also a member of the IR35 Forum.