More reaction to the IR35 business entity test

The reactions to HMRC’s IR35 business entity tests from those in the contracting world have ranged from lukewarm at best to utter dismay at worst.

One critic of the test is the Professional Contractors Group, which claims that HMRC has ‘missed a great opportunity to end 12 years of confusion, disarray and worry over IR35′.

Chris Bryce, chairman of the body, had this to say about the test: “HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35.”

In short, the business entity test has failed to provide the clarity many in the sector were hoping for.

One industry figure who has looked at the test from a slightly different perspective is the chief executive officer of ITContractor.com Gerry McLaughlin.  “It looks as if the government’s and HM Revenue and Customs’ endgame is to scare as many freelancers as possible out of limited companies and into umbrella companies,” he said when asked to give his response to the test.

According to Mr McLaughlin, the reason why the government is keen to usher contractors into the umbrella service structure is largely down to generating tax revenues.

Contractors who operate through limited companies can make significant tax savings if their contracts and working practices fall outside of IR35 by taking their salary as a dividend from the company.

With umbrella companies, none of these potential tax advantages exist.

If you contract through an umbrella company you are employees of the company and they will arrange invoices for the work done.

Once payments have been received, the umbrella company will make the payments to you minus tax deductions and National Insurance contributions. The umbrella company will also process your allowable expenses.

While umbrella company contractors do not enjoy the same tax benefits that limited company contractors enjoy, they do not have to concern themselves with complex tax affairs or the day-to-day running of a company.

For Mr McLaughlin, it is in HMRC’s interests that contractors choose the umbrella company route rather than the limited company option.

“As there are more than a million freelancers in the UK, if HMRC can scare another 20 per cent of them into umbrella companies that would be an extra £2 billion for them. If they can scare half of them into umbrella companies that would be a very useful £5 billion extra,” he noted.  Expanding on this idea, Mr McLaughlin added: “It’s an easy way for them to increase their tax take without bringing in any new legislation.”

Summing up, he said that the government seems determined to follow this path and contractors can expect further developments supporting this going forward.

“It looks as if the government sees the future as being an umbrella company future for freelancers, rather than a limited company one and will take further measures to ensure that more freelancers go the umbrella company route in future.”

These are, of course, the thoughts of one man and do not reflect official HMRC policy. There are those who agree with his assessment and those who have a different take on the whole issue.

What his comments illustrate, however, is the way the business entity test has failed to clear up the uncertainty surrounding IR35, leaving contractors in the same state of confusion as before.