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Contractors targeted incorrectly by HMRC’s business entity tests, reveals IR35 survey

Contractors are facing unnecessary IR35 reviews as a result of HMRC’s flawed business entity tests. This is the key conclusion based on the responses of 10,961 contractors taking the ContractorCalculator Free Online IR35 Status Test.

According to ContractorCalculator CEO Dave Chaplin, the results show that HMRC’s business entity tests are flawed and directing HMRC to open status enquiries that have little chance of succeeding

“Taking on cases it cannot win is a shocking waste of HMRC’s limited resources,” says Chaplin, “and puts contractors through the stress and cost of an IR35 review unnecessarily.”

He continues: “Only 19% of the 10,961 taking our online test said they had taken the business entity tests. That reveals that few contractors are bothering at all to use HMRC’s risk assessment tool. Of those that did take the tests, 35% found they were high risk according to HMRC’s criteria, 41% medium risk and 24% low risk.”

However, when the results of the business entity test were compared with the results of the ContractorCalculator Free Online IR35 Status Test, it showed that 31% of contractors in HMRC’s high risk band are outside IR35.

This is significant, as Chaplin explains: “Our online status test is underpinned by algorithms based on IR35 legislation, case law and the results of thousands of actual IR35 reviews.

“In contrast, HMRC’s business entity tests are not underpinned by legislation or case law. Considering HMRC’s own risk assessment tool is targeting contractors incorrectly are, its value must be called into question.”

There is further evidence that HMRC’s risk-based approach introduced in May 2012 is not working. Some inspectors are reneging on the taxman’s commitment to drop IR35 reviews in the early stages if presented with compelling evidence that the contractor is outside IR35. Qdos Consulting’s Andy Vessey explains: “Some investigating officers are disregarding compelling evidence that should halt reviews right at the start.

“With one contractor’s case, I presented evidence that he was clearly in business and suffering financial risk, but HMRC has insisted on contacting the contractor’s client. This approach harks back to the old style enquiries when HMRC used to contact clients in each and every IR35 case.”

Chaplin concludes: “HMRC was criticised from the outset by tax experts who identified that the business entity tests were unworkable. The evidence from our survey, alongside data we hope to secure from HMRC via Freedom of Information requests, proves that HMRC’s risk based approach introduced last year is not working.”

Published: 26 February 2013

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