The latest minutes of the IR35 Forum reporting on the results of its meeting held on 7 May 2014 confirm what contractors and the wider contracting sector have known since May 2014. The Business Entity Tests (BETs) are not fit for purpose and should be abolished.
Since they were first introduced in May 2012 as part of HMRC’s then new framework for the better administration of IR35, the BETs have been criticised as being inconsistent with the underlying IR35 legislation.
Shortly after the BETs were introduced, we added a question to our Free Online IR35 Status Test that asked contractors whether they had also taken the BETs, and what was their result. Firstly, only 18% bothered to use the BETs.
Then, when we analysed the responses of those that did, 60% of the contractors considered to be high risk of being inside IR35 according to the BETs criteria were actually outside IR35 according to the underlying case law and legislation that drives our test.
HMRC has defended the BETs, highlighting that they were only ever intended to be a risk profiling tool and were not designed to be used to actually determine IR35 status. In fact, if used properly, the BETs offered contractors who had a low risk score a ‘get-out-of-jail-free’ card for three years. So, in principle they might have had some value.
Sadly, that subtle point – the fact that the BETs are a risk profiling tool and not an IR35 test - has been lost on many. In particular, public sector clients have used the BETs as a definitive IR35 status tool to the detriment of many contractors’ livelihoods.
The BETs were introduced 28 months ago and HMRC was due to report on the effectiveness of its new IR35 administration framework to the IR35 Forum in the summer of 2013.
Yet, nothing has so far been published about how the BETs are being used and how effective they have been as a risk profiling tool in IR35 Forum minutes.
Is it possible that there is a correlation between our data that shows the BETs are a poor IR35 risk profiling tool and the abuse of the tests by public sector clients, and the delay in HMRC publishing any kind of performance analysis?
The forum minutes show that a meeting will be held “to discuss the recommendations for the BETs”, but no indication was given as to when.
The review of the new administration framework is due to be published in September 2014, and has been under preparation for over 12 months. According to the minutes, penned by HMRC: “there has been some delay on the publication”.
Assuming HMRC does publish its report, are we going to be surprised by the findings? Or will it honestly conclude what we all already know, which is that the BETs should be abolished as recommended.