IR35 pilot business entity tests one year on: HMRC plans a review over the summer

Contractors forced to wait until later in the summer to learn the impact of the IR35 pilot business entity tests, as HMRC enlarges its compliance team.

Contractors keen to learn how the IR35 pilot business entity tests have been performing will have to wait until later in the summer of 2013. HMRC told the IR35 Forum that it “will be evaluating the business entity tests, the Contract Review Service and the new compliance approach” in time for the next forum meeting in August 2013.

HMRC did reveal that there have been 8,210 downloads since the pages went live in May 2012. If that figure is accurate, it suggests only a fraction of the UK’s 1.56m contractors and freelancers consider themselves to be sufficiently at risk of IR35 that they feel the need to take the business entity tests.

The last 12 months has also seen a similarly low take-up of the Contract Review Service, which HMRC revamped in May 2012 to provide contract opinions for contractors. During the tax year 2012-2013, there had been 1,177 queries. This figures also appears low, especially when, according to HMRC, some of the queries could be as basic as “what is IR35?”.

HMRC highlighted that the service “had reviewed 95 contracts and given responses in 89 cases: in 70 of those, it was ‘unable to give an opinion’.” HMRC explained the service’s low response rate was because “complete certainty was required” and that, not surprisingly, contractors using the service were unwilling to provide too much information or allow HMRC to approach their clients directly.

The latest forum minutes also reported that a new HMRC team of IR35 specialists was opening in Bradford. This will bring the total number of specialist HMRC IR35 teams to four, and significantly increase the number of IR35 reviews HMRC can conduct at any one time.

However, HMRC’s ultimate aim is to enable non-specialist investigation teams to handle IR35 cases, which was unsurprisingly met with dismay by some IR35 Forum members.

Many of the historical problems associated with IR35 were as a result of non-specialist HMRC investigators misinterpreting the highly complex provisions of the IR35 legislation, and misapplying it to contractors who were quite clearly not disguised employees.

Should such a move arise, it would appear to be a return to the bad old days, where innocent contractors become targeted by tax inspectors who didn’t understand how IR35 works.

The next forum meeting is scheduled for 1 August 2013, and with the minutes taking an average of 1-2 months to be published, it is likely to be September at the earliest before we learn how effective the business entity tests have been, unless they are published separately beforehand.


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Shams Urrehman
MD SkyTax

Hi, I'm Shams Urrehman, Qualified accountant since 2005 and Director at SkyTax Ltd since 2009. I have been advising freelancers, management consultancies, IT contractors, SME’s and other businesses about accounts and tax planning.

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