Limited company contractors are being advised by IR35 experts to “keep calm and contract on”, in response to HMRC’s new business entity tests, example scenarios and guidance.
“For contractors, its business as usual for deciding their IR35 status,” explains Kate Cottrell of Bauer & Cottrell. “Ignore all the hype about the tests, as the legislation has not changed.”
Qdos Consulting’s Andy Vessey agrees, and adds that it is more important than ever for contractors to maintain IR35 best practice: “IR35 has not changed, but the level of enforcement by HMRC has, and we can expect to see the number of IR35 reviews of contractors by HMRC increase dramatically.”
Both experts urge contractors to continue with contract reviews, seek professional advice to create confirmation of arrangements and maintain tax investigation insurance. “Contractors who have been considering their IR35 status are arguably ahead of the game and should be very well prepared in the event of an investigation,” says Cottrell.
Business entity tests fall short of delivering certainty, but have potential
Cottrell believes that, in their current form, the new business entity tests are another layer of complexity: “Everyone is trying to treat them as the IR35 status test, which we know they are not,” she says.
Vessey’s view is that the tests in their current form fail to provide contractors with certainty about their IR35 status: “One of the main drivers of improving IR35’s administration is to provide contractors with certainty. Providing a straightforward test that will provide three years of certainty is a step in the right direction. Unfortunately, the current scoring of the tests does not deliver that certainty. Yet.”
But according to Vessey, who attended an HMRC IR35 operational approach meeting just before the tests were published, there is scope and a willingness on the part of HMRC to learn and adjust the tests to deliver greater certainty.
He explains: “The tests’ scoring is currently skewed. For example, when they represent such a major financial commitment, why do the advertising and business premises tests score relatively poorly? HMRC has made it clear from the outset that the tests are on trial for 12 months and that it welcomes feedback.” He urges contractors to do just that, saying, “I genuinely believe HMRC will respond positively to constructive feedback.”
IR35 Forum member Cottrell has a similar message: “Nothing is set in stone, so the tests could even be abandoned altogether if they prove to be ineffective. HMRC had to start somewhere with the scores; but if the tests were too easy they would not deliver worthwhile results, and if the tests were too hard, the result would be the same.
“The IR35 Forum [which helped devise the tests] will continue and we can provide feedback on all the new measures.”
How the business entity tests might impact on contractors
“HMRC are keen for contractors to take the tests but it is voluntary,” continues Cottrell. “Those contractors whose scores place them in the low risk category will need to prove it, so that HMRC will walk away, and stay away for three years ‘as long as they are satisfied’ and the contractor’s situation does not change.”
Vessey’s concern is that, under the existing scoring regime, most ‘classic’ contractors will fall into the medium risk band. But he warns contractors against trying to ‘fiddle’ the results, offering the following example: “Within hours of the HMRC’s new guidance being published we were asked if a contractor who changed address to their accountant’s office and rented a space would pass HMRC’s business premises test. According to the guidance, there is no reason why they should not, and gain ten points.
“However, there is a trap, in that if the contractor is clearly not using that space, then the cost is not being incurred wholly and exclusively for business purposes, so the contractor’s limited company would not enjoy corporation tax relief. HMRC would spot this in the corporation tax return, and the truth would emerge that the office rental was a sham.”
“There is no point in contractors trying to manipulate the tests and there will be no point in trying to delay providing documents if investigated,” adds Cottrell. “HMRC will use its powers to conduct the investigation as quickly as possible.”
HMRC to ramp up compliance activity
Cottrell and Vessey both agree that compliance activity will increase within a matter of weeks. They confirm that HMRC has created three dedicated compliance teams of twelve members each in Croydon, Salford and Edinburgh, with an expert status inspector embedded in each team.
“The first tranche of letters are imminently to be sent to contractors viewed as high risk, or ‘disguised employees’ as HMRC describes them,” says Vessey. “Although HMRC won’t share its risk criteria with contractors and their advisors, it has considerable resources it can use to identify high-risk contractors.”
Cottrell concludes: “There will be a lot more investigations in order to test all the new processes, and I expect that there may be an increase in contractors seeking to bolster their IR35 defences.”