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Business Entity Tests scrapped by HMRC

November 6, 2014  /   No Comments

Nick Elvin

HMRC is to drop Business Entity Tests (BETs), which contractors can take to self-assess their risk of being investigated under IR35 legislation.

A review by the independent IR35 Forum found that the BETs, introduced in 2012, were used very little and were not fulfilling their intended purpose, and recommended their withdrawal.

HMRC accepted the recommendation and will withdraw the BETs from April 6, 2015. Until then, businesses can continue to take the tests if they wish or are asked to do so as part of a tendering process. The BETs won’t be taken into account when HMRC opens an IR35 enquiry on or after April 6.

IR35 legislation aims to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships. It applies in circumstances where an individual worker would otherwise, for tax and NIC purposes, be regarded as an employee of the client.

HMRC will shortly publish new IR35 guidance for businesses on the gov.uk website.

Tom Hadley, director of policy and professional services at the Recruitment and Employment Confederation (REC), said: “Through our membership of HMRC’s IR35 Forum, we carried out a joint review of the tests with IPSE and APSCo and found that they were ineffective in giving businesses greater certainty about their risk, and were not always used correctly or consistently.

“This was particularly evident in the public sector where some departments have inappropriately applied the risk scores or have created their own versions to satisfy guidelines set by the Treasury for off-payroll contractors.”

Theresa Mimnagh, of the compliance and recruitment law specialist Lawspeed, which is legal adviser to the Association of Recruitment Consultancies (ARC), said: “The test was always surprising as it looked at the contractor’s business rather than the relationship with the hirer, and IR35 is a tax that is based on the quasi-employment relationship with the hirer.

“We hope that new guidance will help simplify the understanding of contractors so that further confusion is avoided.”

IPSE’s director of policy and external relations, Simon McVicker, added: “The BETs had the potential to bring real clarity to independent professionals working through their own limited companies. Instead the tests were badly designed, poorly scored, and misused from the outset, much to IPSE’s dismay.

“I am therefore pleased to hear that they will finally be scrapped. They have created more uncertainty, not less, with clients especially in the public sector, wrongly using them to assess the tax status of contractors.

“Businesses and the public sector must now stop using the BETs. There are no shortcuts when it comes to engaging highly professional contractors: clients must provide good, solid contracts with independent professionals and establish clearly what the business relationship will be at the outset.”

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