HMRC launches new IR35 – related business entity tests.

The term IR35 refers to the Intermediaries Legislation of 2000, which was drawn up to counter the alleged tax avoidance by people working via personal services companies (contractor/consultant status) to perform work in a manner more like that of a PAYE ’employee’. Despite this legislation HMRC has had little apparent success in dealing with what they consider as abuse of the employment regulations.

In response HMRC has formally launched its business entity tests covering the IR35 rules; these include six example scenarios for IR35 contractors. These long awaited tests are part of HMRC’s overhaul of the IR35 System and they have confirmed that it will also mean an increase in IR35 tax investigations – you have been warned!!!

These tests are designed to show how a contractors’ business works and how they provide services, these tests will allow HMRC to determine if the contractor should be PAYE and therefore pay more Tax and National Insurance or if they are a legitimate contractor and pay a lower Tax and NI rate.

The tests include:

  • Business premises test – Does the business own or rent business premises separately from the contractor’s home or end client’s premises?
  • PII test – Does the contractor need professional indemnity insurance?
  • Efficiency test – Has the business had the opportunity in the past two years to increase its revenue by working more efficiently?
  • Assistance test – Does the business employ any workers who bring in at least 25% of the yearly turnover?
  • Advertising test – Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising.
  • Previous PAYE test – During the past year, has the end client engaged you with no major changes to your working arrangements.
  • Business plan test – Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account?
  • Repair at own expense test – Would the business have to bear the cost of rectifying any mistakes?
  • Client risk test – During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover?
  • Billing test – Does the business invoice for work carried out before being paid and negotiate payment terms?
  • Right of substitution test – Does the business have the right to send a substitute?
  • Actual substitution test – Has the business hired anyone in the previous two years to do the work it has taken on?

We of course wait to see what effect this may have in the future but you can find out more by reading our introduction to IR35

If you feel that you may be adversely affected by this change of attitude by HMRC please contact Mike Scott on 0845 365 1000 or email mike.scott@hsj.uk.com