Risk assessment for IR35 legislation

HMRC’s basic position is that personal service companies (PSCs) should be able to self-assess whether or not IR35 applies, but it also holds the view that there is “significant non-compliance” with the IR35 rules (see the 2015 IR35 Discussion document , page 4), although there are no reliable statistics in this area. Whatever the level of non-compliance with the IR35 regime, it is not at all clear to what extent it is attributable to ignorance of the rules, an inability to navigate those rules, businesses and advisers coming to a different conclusion to HMRC on the basis of the facts or deliberate non-compliance.

Against this backdrop, it is easy to understand why HMRC compliance teams focus on IR35, but it can be hard for any PSC (or its adviser) to assess its own level of risk of IR35 challenge from one of those compliance teams.

HMRC released guidance on a new approach to IR35 in 2012. That guidance included elements intended to provide assurance to those businesses that are outside IR35. This included a publication of a set of Business Entity Tests (BETs). These BETs allowed businesses to self-assess the risk that HMRC would want to open an enquiry on the basis that IR35 should be applied, but following recommendations made by the IR35 Forum, BETs were withdrawn as from 6 April 2015. It is worth noting however that the results of BETs undertaken by PSCs before 6 April 2015 may have something of a short–term continued effect.

If a PSC applied the BETs (during their limited lifespan) and the result was that the business was outside IR35 or in the low risk band, that result may still have a bearing in an IR35 enquiry. When BETs were still “live”, HMRC said that it would close any IR35 enquiry it opened if presented with “low risk” or “outside IR35” result from a business entity test