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IR35 Business Entity Tests to be scrapped

by | Oct 30, 2014 | IR35

HMRC’s IR35 Business Entity Tests (BET), used to supposedly identify whether given contract engagements were at risk of being caught by IR35 or not, is to be withdrawn.

The test was introduced in 2012 and comprises a set of 12 questions, each of which require a ‘yes’ or ‘no’ answer. Each question confers a certain number of points, depending on the answer, resulting in a total score that supposedly indicates whether a specific engagement is likely to be caught by IR35 or not.

The aim of the test was meant to be to clarify the IR35 situation. However, it has been largely ignored by engagers, self-employed workers and advisers alike, the opinion of many being that the questions, designed by HMRC themselves, are effectively skewed to produce the likelihood of a result that shows the engagement to be at risk of being caught – effectively a scare tactic for contractors to push them into believing they could not legitimately operate as small businesses.

Importantly, the test has no legal basis itself in determining if an engagement is inside or outside or IR35, something that can only be done by looking at the contractual documentation and actual working practices of a given engagement and referencing this against appropriate case law precedent. Indeed, the business entity test did not really properly take account of the key elements that legal precedent has deemed are most important when making an IR35 determination.

HMRC has accepted the recommendation of the IR35 Forum and will withdraw the tests from April 2015.

Notwithstanding the general confusion and disinformation caused by the test since its introduction, it has perhaps caused the most concerning issues where engagers of small businesses have insisted the test is taken and have only granted contracts to those that received the appropriate score, despite this not necessarily being a good guide of whether the engagement is actually caught by IR35; and also despite the fact that it is the engager themselves that sets the key parameters of whether the engagement is likely to be a contract for services or for employment – namely the level of control, personal service and mutuality of obligation required by the engagement. These are not things that are specific to the business or contractor being asked to take the test and answer the questions but are bound up in the basis of the contract and working practices agreed between client and service provider. This trend has been particularly prevalent in the award of public sector contract work.

HMRC has stated that the test can still be used in tendering processes until next April and that for any enquiries brought before this time, where a low score indicates an engagement is outside of IR35, that they will continue to use the test as a basis for closing the enquiry  down. Furthermore, in relation to any enquiries that have previously been closed down as a result of reliance on a low BET score, another enquiry will not be opened within the  three-year period notified at the time.


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