A New Business Entity Test

[WordIsBond]

Ok, so obviously, after the dividend tax changes, the gap between taxation on employment and incorporated contracting has narrowed significantly. In light of that, any reasonable person would say the need for IR35 is gone. Rather than HMRC trying to divine whether or not a person is a hidden employee, they could do something narrow and specific to protect the low-paid from being pushed into self-employment, something that targets the engager rather than the victim. And they could do something narrow to address the Friday-Monday executive who "works for" the BBC, too.

But they won't. IR35 will live when every other abomination hatched by Gordon Brown has died. So what comes next?

I think it is very possible they will propose a new Business Entity Test. In principle, the idea wasn't bad. The test they devised was stupid, it didn't reflect reality, and it was abused by engagers who didn't understand what it was for.

But the general idea wasn't bad. If you can prove you are low risk, HMRC will leave you alone (that saves them time investigating someone where they can't win). If you are high risk, and you don't operate inside IR35, expect penalties if you get caught. It all seems very reasonable, and it wouldn't be all that surprising if it came back.

If you really are in business for yourself, and can prove it, you aren't an employee, even if the client does exercise SDC for a few months. They've constructed this bizarre scenario where someone who is in business can get hammered with taxes on one contract just because of a close working relationship, or something. Or someone who so successfully satisfies their client that they get asked back for another job is suddenly in trouble on their taxes. The first question should be, are you running a business, and if you are, that should end the discussion.

The real problem with the old BETs was the wrong people wrote it. It didn't reflect reality. Fine, you get a whopping lot of points for having employees who generate income, but how many people do? Fine, you get penalised heavily if you were formerly PAYE for your client. But what about other things? The old one was ok as far as it went, but it put emphasis on things that weren't reality for most people. And if you DID rent business premises, it should have been worth a lot more than ten points. Come on, that's ridiculous, if you rent business premises, you are running a business.

If you were going to construct a BET that reflected the reality of contracting, what would you put on it? What's important? I'll start.

1. PII. If you have to have it, and have to buy it yourself, you aren't an employee. This should be worth more than one or two points.
2. Accountancy Fees. If your limited company pays more than £500 / year on accountancy fees, that's an indicator of being in business for yourself.
3. Paid holidays / sick leave / etc. If you get this stuff from your engager, you aren't acting like a business, and it should be negative points. If you don't get it, you are acting like a business, it should be positive points.
4. Multiple clients at the same time. This should be a big plus, most employees won't do this.
5. More than two clients in the last two years. Again, this should be worth points.
6. Legal review of contracts. Businesses do this, employees don't.
7. Advertising. This was on the old BETs, but the threshold was way too high. This should be scaled. If you spend more than £100 on advertising (web-site, stationery, etc), it's one point, if you spend £300 two points, £500 three.

What should be added? This is not a question so much about the silly legal framework that has grown up around IR35, but rather, what do you as a contractor do that is "business-like" rather than "employee-like," whether it is recognised as such by HMRC or not? If you were suddenly the person told to write a BET that reflects the reality of contracting in the UK, what would it look like?

[DaveB]

Worth adding somthing about pensions in there as well, especially with Auto-Enrolement? If the engager enrolls you, you are not a business. If your Ltd. is registered and offers to enroll you, you get points. You get more points if you are actually enrolled.

Or something?

[northernladuk]

I can't help thinking your points are just far too low.. I can't think of anyone that would actually fail that. I mean, £500 a year on accountancy is extremely low. Your SA is £125 for a start. PI and contract checks anyone can do just to get around it. It's free from QDOS so hardly a differentiator. It appears to be a list created by a contractor to help contractors so the entire focus is wrong from HMRC's perspective so just won't fly. The point isn't to have a BET for contractors, it's to have a BET to prove anyone is in business and those thresholds are just far too low. You can buy most of the points for less than a grand.

[jamesbrown]

Anything that isn't applied to each contract separately has the advantage of being simpler to administer, and others provided input to HMRC at the time (e.g. IPSE) about a reasonable set of BETs. However, perhaps more importantly from HMRC's perspective, is whether it has the advantage of increasing tax take sufficiently. In other words, are the conditions sufficiently onerous that a non-business entity wouldn't or couldn't fake them? Remember, this is all about increasing tax take. In the end, I think you'd arrive at something resembling the strict deeming criteria used in other jurisdictions, such as the PSI rules in Oz. Depending on how they're designed, they can end up favouring a particular type of business model, such as "temps", which doesn't really help with their credibility. For example, any "real" business wants to retain good clients for as long as they can, but doesn't want to act like their employee (it's a weird perversion of micro-businesses that they even need to entertain this thought).

[WordIsBond]

I can't help thinking your points are just far too low.. I can't think of anyone that would actually fail that. I mean, £500 a year on accountancy is extremely low. Your SA is £125 for a start. PI and contract checks anyone can do just to get around it. It's free from QDOS so hardly a differentiator. It appears to be a list created by a contractor to help contractors so the entire focus is wrong from HMRC's perspective so just won't fly. The point isn't to have a BET for contractors, it's to have a BET to prove anyone is in business and those thresholds are just far too low. You can buy most of the points for less than a grand.

Yes, PI and contract checks anyone can do. That's not really the point, the point is employees don't do them.

If all you have is PI, contract checks, and stationery, you are still going to be high risk.

In constructing a BET, the first thing is to make a good list of the types of things that businesses do and employees don't. The second is to assign relative values. The third, once you have relative values, is to determine how many points is low or high risk.

I'm assuming if you include more things that you'd have to have more than ten points to escape the low risk band.

[WordIsBond]

Worth adding somthing about pensions in there as well, especially with Auto-Enrolement? If the engager enrolls you, you are not a business. If your Ltd. is registered and offers to enroll you, you get points. You get more points if you are actually enrolled.

Or something?

Yes, this is the kind of thing I was looking for. As noted by others, anyone could do this, but even so, it is the kind of thing a business does and an employee doesn't do, and so should be worth points.

[LondonManc]

Simpler to look at Employee Rights and establish what contractors are not entitled to. The following are permie rights according to the Citizens Advice Bureau (I've taken out some spurious ones and ones that kick in after two years of service to keep it within a couple of mins reading!):

• The right to a written statement of terms of employment within two months of starting work, (see under heading Written statement of the main terms and conditions of employment)
• The right to an itemised pay slip. This applies from the day the employee starts work.
• The right to paid holiday. Full-time employees are entitled to at least 28 days a year. Part-time employees are entitled to a pro rata amount
• The right to time off for trade union duties and activities. This applies from the day the employee starts work. The time off does not necessarily have to be paid.
• Employees also have the right to be accompanied by a trade union representative to a disciplinary or grievance hearing.
• The right to paid time off for ante natal care.
• The right to paid maternity leave.
• The right to paid paternity leave
• The right to paid adoption leave
• The right under Health and Safety law to weekly and daily rest breaks. This applies from the day the employee starts work.
• The right to notice of dismissal, provided you have worked for your employer for at least one calendar month

If you combine these with a ticklist of MOO, PLI, PI and other normal differentiators rather than looking at the SDC then there can be a threshold of, say, meeting at least 80% (or more) of the requirements to prove you're not a disguised permie.

It could be that simple for IR35 instead of all the complexities that they're trying to introduce. That's for the IT industry - does the same make sense to those of you that aren't in IT?

[DaveB]

Simpler to look at Employee Rights and establish what contractors are not entitled to. The following are permie rights according to the Citizens Advice Bureau (I've taken out some spurious ones and ones that kick in after two years of service to keep it within a couple of mins reading!):

• The right to a written statement of terms of employment within two months of starting work, (see under heading Written statement of the main terms and conditions of employment)
• The right to an itemised pay slip. This applies from the day the employee starts work.
• The right to paid holiday. Full-time employees are entitled to at least 28 days a year. Part-time employees are entitled to a pro rata amount
• The right to time off for trade union duties and activities. This applies from the day the employee starts work. The time off does not necessarily have to be paid.
• Employees also have the right to be accompanied by a trade union representative to a disciplinary or grievance hearing.
• The right to paid time off for ante natal care.
• The right to paid maternity leave.
• The right to paid paternity leave
• The right to paid adoption leave
• The right under Health and Safety law to weekly and daily rest breaks. This applies from the day the employee starts work.
• The right to notice of dismissal, provided you have worked for your employer for at least one calendar month

If you combine these with a ticklist of MOO, PLI, PI and other normal differentiators rather than looking at the SDC then there can be a threshold of, say, meeting at least 80% (or more) of the requirements to prove you're not a disguised permie.

It could be that simple for IR35 instead of all the complexities that they're trying to introduce. That's for the IT industry - does the same make sense to those of you that aren't in IT?

The problem with that is it doesnt differentiate between legitimate contractors and those forced into it by unscrupulous "employers". Think low paid cleaners, care staff etc. who are forced down this route because the employers want to avoid having to give them all these rights.

[jamesbrown]

I'm increasingly of the opinion that we should do away with all tests and distinctions. For taxation purposes, let's stop distinguishing between real employees, disguised employees and non-employees and between real businesses and fake businesses. Even in the absence of more aggressive reforms on NI, there are mechanisms to reduce the disparity between the taxation of employees and the self-employed, including the new dividend tax. These mechanisms should be used to a degree that can be supported by the electorate. Let's deal with unscrupulous employers through legislation, as this is a distinct category.

When the differences in taxation between employment and self-employment properly reflect the additional costs (and to some degree the risks) associated with self employment, any questions about real and fake employees and real and fake businesses naturally disappear. No one wants to start a fake business unless there's a major incentive to do so, whether from the perspective of the employee or the employer. I have no problem in paying a dividend tax. I would think it's in the interests of the gov't to support a flexible workforce through T&S, but some aspects are clearly silly, so let's do away with relief on lunch and apply the T&S rules consistently to larger consultancies. All of these distinctions between real and fake employees and businesses are on a road to nowhere.

[LisaContractorUmbrella]

Could you simplify it completely by using a percentage of costs from turnover as a determinant? E.g. if your business costs are more than 10% of turnover 'IR35' [placeholder for replacement] won't apply?