New IRS5 guidance comes under fire

New HM Revenue & Customs (HMRC) guidance to clarify the risk of contractors being caught by the IR35 intermediaries legislation has been attacked as a missed opportunity.

The 47-page document, published on 9 May, explains the risk bands HMRC will use to gauge how likely it is that it needs to check whether IR35 applies to and 12 voluntary business entity tests to help people decide whether they are at low, medium or high risk. The 12 tests, which include a scoring system in which the higher the points scored, the lower the risk, cover:

  • business premises
  • professional indemnity insurance
  • efficiency
  • assistance
  • advertising
  • previous PAYE
  • business plan
  • repair at own expense
  • client risk
  • billing
  • right of substitution
  • actual substitution.

The guidance warns people falling into the medium or high risk categories that there is a likelihood that HMRC will check whether IR35 applies to them.

Those in the low risk band are asked to keep evidence to support their answers to the tests, which should be sent to HMRC if it checks whether the legislation applies. If satisfied by the evidence, HMRC says it will not check again whether IR35 applies – provided that the information given is accurate and working arrangements do not change in that time – but says those with a low risk must continue to “keep an eye on their engagements”.

The guidance has been criticised by external organisations represented on HMRC’s IR35 Forum, which described it a missed opportunity to bring clarity and fairness to IR35. They had called for changes to the scoring of the tests, saying the points distribution was unfair, but HMRC refused.

Martin Hesketh, who represents the Freelancer & Contractor Services Association on the forum, said the proposed scoring system would “push a disproportionate number of businesses into the high risk category, and in so doing will prevent genuinely high risk cases from being identified.”

The IR35 Forum will now monitor the impact of the new measures over the next 12 months in what HMRC have termed “the test and learn phase”.

Link: The HMRC guidance