IR35 and BETs: Are You High Risk?

About Business Entity Tests

Business Entity Tests (BETs) were introduced in 2012 and designed for contractors and freelancers to estimate the likelihood of their contract and day-to-day practices falling into "disguised employment", that is, to see whether their status fell inside or outside IR35 legislation.

As a contractor or freelancer you should take the DNS Business Entity Test and contact us immediately if the results show that you are medium or high risk. BETs are aimed at building up a picture of how your business provides services to your end-client and gauges how likely it is that your company will fall foul of IR35 based on your current contract:

• Low risk: No pointers in your contract suggest IR35 may apply;
• Medium risk: Some pointers in your contract suggest IR35 may apply; others don’t.
• High risk: Several pointers in your contract suggest IR35 may apply.

Is IR35 Clear and transparent?

When the House of Lords’ Personal Service Companies Committee sat for the first time on 25/11/2013, it was IR35 that received most of the attention. Two main problems were highlighted:

• Difficulty in defining exactly what constitutes a personal service company

(as no single legal definition of the term exits it’s difficult to define, but limited companies with only one director may be most at risk);

• Confusion over the definition of an "office holder" (seen as vital to deciding who may or may not be covered by IR35).

The deterrent effect

HMRC’s deputy director for employment status, Rowena Fletcher admitted to the committee that IR35 is largely acting as "a deterrent". It is difficult, she said, to tell exactly how far it has benefited the Treasury. The committee was told that the overall cost of monitoring and complying with IR35 could equal or exceed the actual cash yield, but it would come "nowhere near" the amount of tax protected. Coverage across various industry sectors ensured that no taxpayers felt they were immune from investigation. Abolishing IR35, therefore, would open up the risk of "more abuse".

Does IR35 put honest freelancers and contractors under undue pressure?

It is the "deterrent" aspect that makes many, many contractors and freelancers and accountants see IR35 as a form of "entrapment"; a revenue raiser that snares honest contractors and freelancers.

HMRC opened 256 new IR35 enquiries in 2012/13 and a further 112 in the current tax year. All were "high risk" cases where HMRC believed that all contracts would be caught. HMRC anticipated that five current IR35 disputes would proceed to a tribunal. Apparently, in 2012/13, 1,200 calls were made to HMRC’s IR35 helpline and 80 contract reviews were sought. During the current tax year a further 65 contract reviews had been requested.

How to make IR35 less burdensome for honest contractors and freelancers

A report by the Office of Tax Simplification said that a commitment from the government to integrate income tax and national insurance contributions would have led to a reduction in the "tax motivation for incorporation".

The system needed to be run with a "light as possible" touch the OTS argued. A very large number of people were potentially exposed to IR35, and the challenge was how to target the small minority at risk without burdening the majority.

Public opinion

The committee will be holding public hearings to hear evidence from different involved parties up until January 2014. Anyone with an interest in the subject of personal service companies is invited to submit evidence to HMRC by 31 December. Then the committee will report back to the House with recommendations in March.

Issues that the committee would like to hear about are:

• The burdens involved in IR35 compliance;
• Whether HMRC’s attempts to improve how it deals with IR35 judgments have been successful;
• How widely businesses insist on working with personal service companies;
• Advantages and disadvantages of operating through a personal service company.

Have your say

Send DNS your opinions and we’ll present them to the committee on your behalf

The DNS Business Entity Test will estimate your risk: contact us if your score is medium or high risk. Learn how to avoid falling into the IR35 trap.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.