Introduction: the business entity tests and example scenarios
Business entity tests and example scenarios were published on the HMRC website in May 2012 to support the Government’s drive to improve the administration of IR35 (ESM3012). They can be accessed via the IR35 section of the website at . They were developed with the assistance of the IR35 Forum to:
- help customers decide how likely it is that IR35 will apply to their arrangements in general
- provide advice about what to do in the customer’s circumstances
- determine the likelihood of an intervention by HMRC
- reduce the burdens on businesses which are not being used to disguise employment
The business entity tests will be withdrawn from 6 April 2015.
Business entity tests
The business entity tests help customers self-assess the overall risk that the IR35 provisions will apply to their business. They are made up of a series of weighted questions whose answers are allocated a plus or minus score. The totalled score determines whether the business risk in relation to IR35 is low, medium or high. The tests are voluntary and should be retaken if circumstances change. Customers taking the tests should gather and retain evidence to support their answers.
However, the tests only establish the IR35 risk of the business in general. Intermediaries must still consider whether IR35 legislation applies to each separate contractual arrangement regardless of the outcome of the business entity tests. The tests themselves cannot be used to determine whether IR35 applies to any particular engagement because:
- the risk band only indicates the likelihood of HMRC checking whether IR35 applies, and
- the tests only consider the business arrangements overall, and
- IR35 legislation must be applied to each engagement separately.
Interaction of the business entity tests and HMRC reviews
HMRC uses a risk based approach to check compliance with IR35 legislation. The initial focus is on the nature of the business as a whole to assess the likelihood that it has entered into arrangements to which IR35 applies. HMRC writes to businesses judged medium to high risk and asks if they have considered IR35. If a business has taken the business entity tests and can show to HMRC’s satisfaction by means of evidence that they are either outside IR35 or in the “low risk” band, then any review will be closed and there will be no further check for 3 years provided:
- the information given is accurate, and
- the circumstances, and particularly the working arrangements, do not change.
When this applies, the business must still continue to consider each separate engagement and apply IR35 when appropriate.
If a business fails to show they are outside IR35/low risk, or has taken the business entity tests and is in the “medium” or “high risk” bands, then HMRC is likely to continue with any review and will examine individual contractual arrangements in the light of relevant case law to determine if IR35 applies to each separate engagement.
The example scenarios
HMRC and the IR35 Forum have developed example scenarios (published with the Business entity tests) to illustrate when and why IR35 applies to a specific engagement. The scenarios are intended to demonstrate some of the factors that can help decide whether or not IR35 applies. However, the example scenarios do not explain IR35 in detail nor seek to bring out all the relevant points. The circumstances of every engagement are different and each must be considered on its own merits. HMRC provides advice and guidance to help external customers determine whether IR35 applies to a particular contractual arrangement (ESM3008).
The example scenarios will be withdrawn from 6 April 2015.