Contractors will no longer be required to take the Business Entity Tests (BETs) as a precursor to an IR35 investigation. HMRC has announced that from 6 April 2015, the tests will be abolished. The taxman has acknowledged that the BETs are unworkable and taken action. Could the Treasury and HMRC take the same view about IR35?
We warned that the BETs were unworkable back in April 2012 before HMRC had even officially published the new tests. Then, in February 2013, eight months after the BETs were introduced we completed an analysis of the data from nearly 11,000 results from our online IR35 status test and correlated them with contractors’ BETs results.
Our findings were startling, showing than less than one in five contractors actually bothered with the BETs and of those that did, the margin of error was huge. Contractors found outside IR35 by our algorithm that is based on IR35 source legislation, case law and actual IR35 investigation results were being found to be high risk according to HMRC’s own risk profiling tool.
The problem was, and is, not with the concept of having a business test. That was generally agreed to be a good thing by the IR35 Forum. The problem was HMRC’s choice of tests, scoring and weighting. Our exercise in comparing BETs results against status tests actually based on IR35 case law proved this.
So, the findings of an IR35 Forum focus group proposing that the BETs were unfit for purpose, published in October 2014 in the May 2014 minutes, came as no surprise. What is also no surprise is that HMRC has abolished the BETs ahead of its much heralded review of the ‘better’ IR35 administration measures introduced in May 2012.
We have sought, via Freedom of Information Act (FOI) requests, performance data from HMRC on multiple occasions over the course of 18 months and have been consistently stonewalled. The review of IR35 was supposed to be published during October 2014, but HMRC has missed yet another deadline.
We have been told that it is likely to be released in stages. Whenever it comes, we should not be surprised if we are told that the BETs were largely ineffectual at contributing to effective, ‘better’ IR35 administration and implementation.
But perhaps something positive could come from this sorry episode. HMRC clearly has the capacity to respond to overwhelming evidence that something is not working properly. Even if we did not have evidence that IR35 is not working stretching back fifteen years, the findings of the House of Lords’ Select Committee on Personal Service Companies (PSCs) inquiry certainly hammered this home.
We know that nothing will happen before the General Election in May 2015, and it is unlikely that anything will happen for the balance of the year as any new administration becomes bedded down. But could IR35 be next on the list for possible cancellation?