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IR35: Business Entity Tests to be withdrawn

HMRC have confirmed that, on or after 6 April 2015, business entity tests will not be taken into account when carrying out an…

As our readers will be aware, the IR35 rules concern individual contractors who supply their services through an intermediary (commonly a personal service company). The rules were introduced in April 2000 to enable HMRC to deal with situations where the sole purpose of the intermediary arrangements is to avoid liability for tax and NI.

If, in the absence of the intermediary arrangement, the individual would be regarded as an “employee” of the client for tax purposes then the IR35 rules ensure that the worker will be subject to tax and NI deductions.

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In May 2012 the HMRC published guidance on its approach to checking individual business’ compliance with the IR35 rules.  In its risk-based approach, HMRC set three categories of risk – low, medium and high. For example, a high risk would mean that you would be more likely to have an IR35 review than those in a medium or low band risk.

Where a business can prove to HMRC that it is a low risk, then HMRC would close its IR35 review and undertake not to carry out IR35 checks against the business for the next three years.

The 2012 guidance contained 12 “business entity tests” to allow businesses to consider and present their level of risk to HMRC, depending on the score they achieve in the tests. However, a recent review carried out by the IR35 Forum found that the tests were little used by businesses and were not fulfilling their intended purpose.

As a result, HMRC have confirmed that, on or after 6 April 2015, business entity tests will not be taken into account when carrying out an IR35 enquiry. However, prior to that date, if a business can demonstrate to HMRC that they have taken a business entity test and the outcome is “low risk”, then HMRC would close the enquiry and not carry out a check again for three years.

To confirm, where HMRC has closed an enquiry previously on the basis of a business entity test, it will not reopen another enquiry within the three year period, as previously notified to them.

Finally, HMRC have confirmed there are no plans to replace the tests, but they do intend to publish updated guidance on their website.

In May 2012 the HMRC published guidance on its approach to checking individual business’ compliance with the IR35 rules.  In its risk-based approach, HMRC set three categories of risk – low, medium and high. For example, a high risk would mean that you would be more likely to have an IR35 review than those in a medium or low band risk.

Where a business can prove to HMRC that it is a low risk, then HMRC would close its IR35 review and undertake not to carry out IR35 checks against the business for the next three years.

The 2012 guidance contained 12 “business entity tests” to allow businesses to consider and present their level of risk to HMRC, depending on the score they achieve in the tests. However, a recent review carried out by the IR35 Forum found that the tests were little used by businesses and were not fulfilling their intended purpose.

As a result, HMRC have confirmed that, on or after 6 April 2015, business entity tests will not be taken into account when carrying out an IR35 enquiry. However, prior to that date, if a business can demonstrate to HMRC that they have taken a business entity test and the outcome is “low risk”, then HMRC would close the enquiry and not carry out a check again for three years.

To confirm, where HMRC has closed an enquiry previously on the basis of a business entity test, it will not reopen another enquiry within the three year period, as previously notified to them.

Finally, HMRC have confirmed there are no plans to replace the tests, but they do intend to publish updated guidance on their website.

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