New IR35 guidance: as clear as mud

The latest guidance that was designed to provide clarity on IR35 has done anything but. Not only are contractors stuck with the same troublesome principles that have been grappled with since IR35s announcement on the contracting scene, but now there are even more tests to apply; Quite literally in the most recent guidance.

For those that have not yet found the time to look through the cumbersome 50 page document published by HMRC on 09/05/12, the key points are summarised below:
•    There are 3 risk bands that relate to how the business as a whole is run
•    To find out which risk band the business is in, you need to take the voluntary test comprised of 12 questions (the ‘business entity test’)
•    The business receives a score for the answers to the 12 questions, which then dictates whether the way the business operates overall is low, medium or high risk.

It would be easy to assume that the risk rating will put contractor’s minds at ease. However the risk rating only applies to the likelihood that HMRC will investigate. This is very different from indicating the likelihood of being inside IR35, which is what every contractor wants to be able to figure out.

In addition to this, the guidance emphasises the importance of continuing to assess each individual assignment regardless of the risk rating given to the business as a whole. It could be asked then, what purpose the risk rating serves? At best it is unclear and at worse plain misleading. For example a low risk contractor could be duped into thinking that all of their assignments are automatically outside of IR35 due to being low risk within the ‘business entity test.

Needless to say the only parties that stand to gain from these rules are those who assist contractors in setting up companies, who may now jump on the ‘business entity test’ as some sort of marketing ploy – “we can assist in setting up low risk companies as recommended by HMRC”. This could leave contractors to believe that all of their assignments are outside of IR35 regardless of the working practices of each individual assignment.

Why would a contractor want to know the risk rating of their company generally if, as is stated in the guidance, a low risk company can still have individual assignments that are caught by IR35? Advice to contractors must remain the same following this guidance; that it is crucial to have each assignment assessed to check whether you are at risk of IR35.

This is so even where there are multiple assignments with the same hirer, as working practices may change over time. This was highlighted in the recently reported JLJ services case, where a contractor was found to be inside IR35 for part of his relationship with the client and outside of IR35 for the other part.

So does the new guidance provide more questions than answers? One positive that can be taken from the guidance is that the scoring system attributes different points to each indicator of self-employment. For example a substitution clause is worth 2 points, whereas evidence of an actual substitution is worth 20 points.

This can help contractors to establish which indicators are more important than others to HMRC in determining the bigger picture of whether a relationship of deemed employment might exist. It may further assist in indicating which parts of a contract or working practices should be focused on in negotiation with a client or agency. However the ‘business entity test’ might lead to some contractors paying PAYE and NICs contributions on the basis that they are considered high risk over all, even though individual assignments are not caught by IR35 due to the working practices.

Rather than providing the certainty many contractors craved, the unhelpful guidance states on page 11 that these rules are subject to change. No change there then!

Author: Ricky Coleman