Business Entity Tests

[Contreras]

Ive noted on here that experienced people advise that if you can prove just one of the following you are outside IR35,as all three must be in place to put you inside, i.e either Right of Substitution, Lack of Direction/control, or lack of Mutuality of Obligation.

Correct.

Ive just looked at the business entity tests though and they don't seem to ask much that is relevant to MOO. I score about 10 making me borderline high risk even though I reckon I can reasonably claim lack of MOO and Lack of control.

The law has not changed. The BETs are supposedly only a trial exercise for HMRC. As I understand it, if you can demonstrate "low risk" on the BETs then you can basically instruct HMRC to cease and desist on any IR35 enquiry.

There was talk about HMRC sending out "thousands" of letters asking people to justify their own IR35 status (using the BETs) or risk an enquiry, thus casting the net wider with minimal effort on their part. I've seen a copy of the letter but nothing to suggest that it has been issued on the scale originally suggested, perhaps they are just getting warmed up though.

Finally one of the BET questions asks if you worked for an end client under PAYE previously in the same role. If you did, you score minus 35 points making it an effective fail. I have worked through agency and umbrella for Company ... Does this mean I fail this test on this contract?

No, IMHO. Search for "Friday to Monday" or "F2M" if you want the background to this. If you had been a genuine (not disguised) PAYE employee of the client then that would be F2M.

I see HMRC offer their own contract review service. Has anyone used this?

Is that like the turkey asking the farmer if it looks fat?

[malvolio]

I wouldn't like to make an assumption on these 3 questions and if I could only satisfy 1 I'd be very worried!

If that were true then so would I. The BETs have about as much relevance to your IR35 status as your preference in tea drinking. Or perhaps even less... The BETs are HMRC's peculiar attempt to establish that you are a real business - as in "real busineses deliberately incur debts and non-payment is a good thing". They also ignore established case law, else why, for example, is the right of substitution disregarded?

Case Law hasn't changed, your status is determined by the application of the three key employement tests (D&C, MOO, RoS, as per the original RMC case) to the reality of your engagement and, where there is ambiguity, your contract. If you can prove otherwise I would be most interested to learn exactly how.

Yes, HMRC offer a review service. The answer will take weeks and will be "You are caught". Really useful.... not. And usingit, incidentally, will almost certainly invalidate your PEI insurance.

[LisaContractorUmbrella]

I would appreciate some informed views on here about the HMRC business entity Test.

Before talking about these, Ive noted on here that experienced people advise that if you can prove just one of the following you are outside IR35,as all three must be in place to put you inside, i.e either Right of Substitution, Lack of Direction/control, or lack of Mutuality of Obligation. I thought I would be ok as I reckon I can show lack of MOO and 2 out of 4 points of lack of Direction.

Ive just looked at the business entity tests though and they don't seem to ask much that is relevant to MOO. I score about 10 making me borderline high risk even though I reckon I can reasonably claim lack of MOO and Lack of control.

Finally one of the BET questions asks if you worked for an end client under PAYE previously in the same role. If you did, you score minus 35 points making it an effective fail. I have worked through agency and umbrella for Company A since January, obviously paying PAYE through the umbrella. I had intended to carry on with Company A under the agency's Ltd Co contract with my ltd. Does this mean I fail this test on this contract? It seems so but I thought I'd ask.

finally, I see HMRC offer their own contract review service. Has anyone used this?

The BET's are based on HMR&C's interpretation of the IR35 legislation and what they would expect to see from a contractor working in business on their own account and just because you show as high risk using their tests it doesn't mean that you would lose a tax tribunal, it just means that you are at high risk of investigation should you show up on HMR&C's radar. If you are a social worker, as your name suggests, then IMHO you areas of concern would be allocation of work, reporting requirements, hours of work, case reviews and your obligations within the organisation you are working for

[Kate Cottrell]

BETS

As Lisa says the Business Entity Tests are all about the risk of investigation and are simply HMRC guidance.
In my experience it is very rare indeed for a Social Worker to be outside IR35 especially if they are undertaking the usual business of a Social Worker. As this type of work involves the use of public money then they will now be affected by the Public Sector Appointees rules and will have to provide assurances that the correcet levels of tax and NIC are being paid. Rather than trying for a low score under the BETS (most people score medium or high) you should ask your accountant to advise on your IR35 position.

[northernladuk]

As Lisa says the Business Entity Tests are all about the risk of investigation and are simply HMRC guidance.
In my experience it is very rare indeed for a Social Worker to be outside IR35 especially if they are undertaking the usual business of a Social Worker. As this type of work involves the use of public money then they will now be affected by the Public Sector Appointees rules and will have to provide assurances that the correcet levels of tax and NIC are being paid. Rather than trying for a low score under the BETS (most people score medium or high) you should ask your accountant to advise on your IR35 position.

Is an accountant really the best person to ask?

[SimonMac]

Is an accountant really the best person to ask?

He's asking on a random anonymous internet forum, can he do any worse?

[northernladuk]

I would appreciate some informed views on here about the HMRC business entity Test.

Before talking about these, Ive noted on here that experienced people advise that if you can prove just one of the following you are outside IR35,as all three must be in place to put you inside, i.e either Right of Substitution, Lack of Direction/control, or lack of Mutuality of Obligation. I thought I would be ok as I reckon I can show lack of MOO and 2 out of 4 points of lack of Direction.

Ive just looked at the business entity tests though and they don't seem to ask much that is relevant to MOO. I score about 10 making me borderline high risk even though I reckon I can reasonably claim lack of MOO and Lack of control.

Finally one of the BET questions asks if you worked for an end client under PAYE previously in the same role. If you did, you score minus 35 points making it an effective fail. I have worked through agency and umbrella for Company A since January, obviously paying PAYE through the umbrella. I had intended to carry on with Company A under the agency's Ltd Co contract with my ltd. Does this mean I fail this test on this contract? It seems so but I thought I'd ask.

finally, I see HMRC offer their own contract review service. Has anyone used this?

There is no MOO as a social worker? They give you a case and you can refuse to do it without getting binned? And direction? I thought with social care there would be set processes and a whole host of hoops to jump through to protect themselves and the patients for legal recourse. The fact you can go see whem when you want etc is part of the job that is also available to permies. I must admit I find it hard to grasp that a contract social worker can be classed as an independant business.

A point that someone else said about a contract and working practices. That leaves it very open for us to read what we want in so have to be very pragmatic. If the contract says something but you are not doing it then the working practices will count. I do believe working practice is much more important so have to be mindful and not rest on your laurels just because it says it on the contract. Most tribunals have a strong element of trying to disprove what is in the contract by taking working practices in to account.

[Wanderer]

He's asking on a random anonymous internet forum, can he do any worse?

Well, he did get a reply from an Expert in IR35 and Employment Status Advice who neither random or anonymous so there is at least some value to discussing it here.

[northernladuk]

He's asking on a random anonymous internet forum, can he do any worse?

True but the IR35 expert is advising he speak to his accountant which I found a bit odd. I wouldn't mail Kate and ask her if I can put my 55" TV through my business...

Just thought it was an odd comment.

[Gemma at Qdos]

As mentioned by previous posters, the BETs are guidance only, with the aim to help contractors self-assess their status. Due to the nature of so-called guidance, the majority of contractors will fall within the medium-high risk category anyway.

Right of Substitution, Control and MOO are the 3 main tests of IR35 status, but proving 1 of 3 to get outside IR35 is definately NOT a rule I would advise anybody to follow. Right of substitution is one of the most important tests and even though you are a social worker, you should still have this right. I hear you screaming "but I have to adhere to numerous security checks etc etc etc I can't substitute". However, as a limited company, your COMPANY is being contracted out to complete a service. YOU should not have to complete the services, your company however, does. What I'm saying is that the test is asking IF, in the hypothetical situation that you had somebody else with the relevant skills, experience and qualification and they could go through all the security checks applicable without harming the terms of the contract, that you would be able to send them in your place and your company would be responsible for them and their pay.
Although mutuality of obligation is a key determining factor surrounding IR35, it is worth noting that HMRC’s lack of understanding and misinterpretation makes it difficult to mount a successful defence on this test alone. Currently, much focus is being placed on non-mutuality of obligations during the contractual term and, as such, it is important that a contractor has the right to walk away from a contract early, if they so choose. i.e you should ensure you have a specific end date and/or the right to terminate the contract (with a notice period no longer than 30 days)

The test asking about previous employment with your client is asking you to confirm if you were permanently employed by your end client before you began contracting to them. There was a case with a bank back in the day where a number of employees of the client agreed to leave the company and return the very next day doing the same work, in the same place with the same people but under a limited company. This is what HMRC want to ensure isn't happening so if you were working for the client via an umbrella before, this is not applicable to you.

I would not advise using HMRC's contract review service. Although they state that the review service and compliance team are completely separate; I work with ex-Revenue inspectors and based on their opinions, I am incredibly sceptical that nothing is "accidentally" passed between departments and those that get a review won't be looked at.

As a whole, you can use the BETs as a rough guide but they are in no way in depth enough for you to accurately assess your status. If you are a public sector worker, you will need to use the test anyway. But you will need to seek professional advice, even with the BETs, as if you don't fully understand what HMRC are asking, such as with the right of substitution (as many contractors don't) then you can easily put your foot in it and get some professional representation to defend your case.

Hope this helps you.