Contractors recently came very close to gaining an element of IR35 certainty for the first time since the legislation was introduced in 2000. And if we keep our nerve for the next 12 months whilst HMRC reviews its business entity test scoring, then we may yet achieve a limited degree of certainty.
But there is a journey to travel first.
HMRC’s new IR35 administration processes and business entity tests include very few useful measures for contractors. And overall, they simply represent an additional layer of complexity for seemingly little or no benefit. The underlying IR35 legislation remains unchanged, so superficially it looks like business as usual for contractors.
But actually, it’s not business as usual. Alongside the business entity tests, we are told a substantial compliance campaign is already underway, led by three dedicated 12-strong teams in three regional offices that each have an embedded expert status inspector.
They are targeting high-risk ‘disguised employees’ who have already been identified by HMRC’s considerable resources. They will all receive letters asking if they have considered IR35, and, if so, why they consider themselves to be outside and what evidence can they produce to back this up.
It also seems that HMRC, against the advice of most of its IR35 Forum colleagues, has chosen to manipulate the scoring of the business entity tests to ensure they capture typical contractors, not just ‘disguised employees’. This is particularly unfortunate, considering the objective of the improved administration of IR35 sought by the Forum was to prune out only those ‘disguised employees’ abusing the use of limited companies as a tax avoidance scheme.
However, despite its refusal to benefit from the enormous capabilities, knowledge and skills available from the non-HMRC members of the IR35 Forum, sources close to HMRC tell us that it is genuine in its desire to ‘test and learn’ over the next 12 months, and to create a workable compromise that meets the needs of all involved.
If that really is the case, it suggests there is the potential for the business entity tests to become a valuable self-certification tool respected by HMRC. And that would allow genuine limited company contractors to use them to enjoy three-year rolling periods of relative IR35 certainty – assuming the circumstances of their contracts don’t change too much, of course.
The tests could also help HMRC weed out those perm-tractors who give genuine contractors a bad name.
The IR35 legislation would then actually act as a ‘safety net’ for any contractor’s whose circumstances means they scored badly in the business entity tests, because if they are not disguised employees, then this would be proved in an IR35 review.
This sounds wonderful, but how do we get there?
Perhaps the solution is to work within the rules as they stand, and prove that they can be improved for the benefit of all? Maybe we should collectively say, ‘Yep, let’s give it a go’, and demonstrate to HMRC that the business entity tests could be made to work so much better – both for the taxman’s revenue-generating requirements and for genuine contractors.
Twelve months of moderate pain may be worth it if the objective of some degree of IR35 certainty is reached by May 2013.