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Contractors face at least two years of the current business entity tests: IR35 Forum

Contractors may be facing at least two years of the business entity tests in their current form, not one as originally promised by HMRC. This is according to the minutes of the latest IR35 Forum held on 23 July 2012, which also reveal that answering the P35 ‘service company question’ will become compulsory in the 2013/2014 tax year.

When the business entity tests were introduced in May 2012, as part of HMRC’s wider strategy for implementing IR35, they were to undergo a 12-month ‘test and learn’ phase and then be revised based on the experiences and evidence of HMRC, IR35 Forum members and contractors.

However, paragraph 15 of the latest minutes say that “changing the relative weighting of any of the questions risked possible confusion.” It goes on to say that “a strong steer” from one of the forum members suggested that “any such changes only be made once, and then in around two years time on the basis of practical experience”. The forum member was not identified.

In their current form, the business entity tests place many genuine contractors in the high risk category due to the scoring of the questions. Forum members such as PCG and the Recruitment and Employment Confederation (REC) have publicly committed to changing the scoring to more accurately reflect the characteristics of genuine contractors.

HMRC also notes that the new compliance teams based in key locations around the UK and overseen at a strategic level by a single individual have led to more IR35 reviews. The good news for contractors is that a consequence of the new structure has been a significant reduction in review turnaround times, with HMRC citing one example that took only six weeks.

Limited company contractors are also one step closer to understanding any new obligations likely to arise as a result of HMRC’s Pay As You Earn (PAYE) Real Time Information (RTI) initiative.

According to the minutes, “HMRC will expect full payment submission returns from employers when salary payments are made”. The tax authority says that by mid-August 2012 it will provide written advice on how dividends are to be accounted for, alongside guidance for contractors inside IR35.

Despite it being “strictly outside the remit of the Forum”, PCG insisted that the Taxation of Controlling Persons Consultation was considered. In response, HMRC acknowledged that the targets of the new legislation are already covered by IR35, but suggested that Forum members actively participate in consultation, including face-to-face sessions over the summer.

The next meeting of the IR35 Forum is due to take place on 9 October 2012, when HMRC plans to make available evidence of how the business entity tests are being implemented and the impact of the new compliance teams.

Published: 10 August 2012

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