News : HMRC reveal IR35 guidance
HM Revenue & Customs (HMRC) have at last released their new Business Entity Tests.
These tests are the outcome from the IR35 Forum set up after the 2010 Budget, charged with the task of looking at the administration of IR35.
The purpose of the business entity tests and risk bands are to help you work out the risk that you will be targeted for an IR35 review. The tests will not tell you whether IR35 applies to you, this can only be ascertained by reviewing each contract and engagement separately. We would suggest that you use the services of Qdos Consulting to review your contract and the working relationship with your client.
Each of the 12 Business Entity Tests will give a score, the total of which will determine whether you are a ‘Low’, ‘Medium’ or ‘High’ risk.
‘Low risk’ (score of 20+) means that there is a low risk that we will check whether IR35 applies to you.
‘Medium risk’ (score between 10 to 20) means there is a medium risk that we will check whether IR35 applies to you. There are some pointers that IR35 applies, but there are some pointers that it does not.
‘High risk’ (score of below 10) means that you are more likely to have an IR35 review than those in the ‘medium risk’ band. There are likely to be several pointers that IR35 applies to you.
If HMRC believe that IR35 may apply to you, they will write and ask if you have thought about IR35 and if you think you are outside IR35 they will ask for evidence of this.
If you can show that you are in the ‘low risk’ band, they will close their IR35 review and undertake not to check your IR35 status for the next three years provided you have been truthful and your circumstances do not change.
Contractors should remember that even if you take the test and come out as ‘high risk’ this does not mean that IR35 applied to you. IR35 is assessed on the basis of the contract and your working relationships etc, with the right advice and support IR35 should not be a problem for most UK contractors.
The 12 Business Entity Tests are as follows:
Business Premises Test
Does your business own or rent business premises which are separate both from your home and from the end client’s premises?
Yes – 10 points
PII Test
Do you need professional indemnity insurance?
Yes – 2 points
Efficiency Test
Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently?
Yes – 10 points
Assistance Test
Does your business engage any workers who bring in at least 25% of your yearly turnover?
Yes – 35 points
Advertising Test
Has your business spent over £1,200 on advertising in the last 12 months?
Yes – 2 points
Previous PAYE Test
Has the current end client engaged you:
· on PAYE employment terms
· within the 12 months which ended on the last 31 March
· with no major changes to your working arrangements?
Yes – Minus 15 points
Business Plan Test
This test has two parts.
· Does your business have a business plan with a cash flow forecast which you update regularly?
- Does your business have a business bank account, identified as such by the bank, which is separate from your personal account?
Repair at Own Expense Test
Would your business have to bear the cost of having to put right any mistakes?
Yes – 4 points
Client Risk Test
Has your business been unable to recover payment:
· for work done in the last 24 months
· more than 10% of yearly turnover?
Yes – 10 points
Billing Test
Do you invoice for work carried out before being paid and negotiate payment terms?
Yes – 2 points
Right of Substitution Test
Does your business have the right to send a substitute?
Yes – 2 points
Actual Substitution Test
Have you hired anyone in the last 24 months to do the work you have taken on?
Yes – 20 points
The method of scoring does not appear to be very consistent or realistic. The Client Risk test requires a bad debt of 10% of turnover, it is doubtful that any FTSE 250 company would have bad debts this high. It would be more realistic to have this at a much lower level than 10%.
Whilst very few contractors rent a separate office, those that do will only score 10 points for this substantial overhead.
It would seem that HMRC have decided that any contractor who has actually used a substitute or generates at least 25% of the company’s income from other contractors will automatically be graded as ‘low risk’. Likewise it is clear that anyone who has remained with their old employer but is now contracting, HMRC regard this as ‘high risk’.
In addition to the tests, the HMRC guide details six scenarios, each describing a different situation and whether IR35 applies or not.
The full HMRC IR35 Guidance is available here. This also provides the details of each scenario.
HMRC are piloting these tests and scenarios and they indicate that they may review and update them in light of feedback and experience. It is hoped that this does happen; as they stand they fall short of what we were all hoping for.
In April 2013 we can expect an update on how the new tests have worked.
If you have any questions regarding the test and IR35 then please contact us at Nixon Williams.
