IR35 is a piece of tax legislation announced in 1999, which took effect from April 2000. The legislation means that the Revenue can tax some contractors as though they are employees of their clients. Contractors caught by IR35 pay significantly more tax reducing their take home pay by up to 25%.
Earlier this week HMRC announced that it is to withdraw the business entity tests (BETs) intended to help taxpayers assess whether they might be caught by the IR35 legislation, after a review conducted by the IR35 Forum found that the tests were used 'very little' and were not fulfilling their intended purpose.
The tests and example scenarios will be withdrawn from 6 April 2015 and will not be replaced. "Until then, businesses can continue to take the BETs if they wish or are asked to do so as part of a tendering process" HMRC said in a statement earlier this week. New guidance will be published at gov.uk.
The consensus of a focus group of independent advisers was that the tests, introduced in 2012, were not working in the way intended and that "...it would be best if they were abolished", according to minutes of the May 2014 meeting if HMRC's IR35 Forum, published last month.
The Association for Independent Professionals and the Self Employed (IPSE, formerly PCG) welcomed this week's announcement. All external members of the focus group supported the abolition of the tests, it said. IPSE argued "from their introduction" that they were "flawed in both scoring and application."
The July meeting of the IR35 Forum heard that BETs were not generally known about or used: "During the review process Forum members on the review came to the conclusion that the BETs are being misused, and recommend abolishing them. If HMRC adopts this recommendation there will need to be a clear handling and communication process."
The Forum comprises HMRC and taxpayer representatives and professional advisers. It helped HMRC to draw up the tests to provide more certainty for businesses concerned about the risk of being caught by the IR35.
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