HMRC is to drop Business Entity Tests

Knowledge base from Boox

By Jonathan London on 30th October 2014

HMRC is to drop Business Entity Tests

HM Revenue & Customs (HMRC) has announced that it will be dropping the use of Business Entity Tests (BETs) once the next tax year commences.

From April 6th 2015, the use of the BETs to decide whether or not someone is at risk of falling under IR35 will no longer be needed as HMRC has taken into consideration criticism from the IR35 forum of the 12 question test.

HMRC to drop Business Entity Tests

The test itself determines whether or not a contractor is at low, medium or high risk of this and was only introduced in 2012.

Following a review of the BETs, HMRC found that they were both ‘used very little’ and ‘not fulfilling their intended purpose’. This perhaps comes as no surprise as the IR35 forum had previously highlighted that the tests weren’t being incorrectly used by public sector clients who had been using them to establish their employment status, rather than contractors.

HMRC has also stated that the BETs will not be taking into account for any IR35 enquiries which are opened on or after April 6th 2015. However, it did say that ‘if HMRC opens an enquiry before then, and a business can show to HMRC’s satisfaction that they have taken the BETs with an outcome outside IR35 or in the ‘low risk’ band, then HMRC will close the enquiry’.

If the information provided following an enquiry is correct then HMRC won’t look to open another IR35 enquiry for another three years, as long as working arrangements don’t change within the time period.

Simon McVicker, director of policy and external relations of the Association of Independent Professionals and the Self Employed (IPSE), recognised this change by saying: “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.…

Mr McVicker said that he was also ‘pleased’ that the BETs were going to be dropped, partly due to the fact that they were flawed in ‘both scoring and application’.

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