BUSINESS ENTITY TESTS
If you are a contractor or in business providing your ‘personal services’ through a limited company then you may be aware of IR35. If not you should be!
HMRC has begun the process of overhauling its operation of the IR35 regime for personal services companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated. The overhaul may mean an increase in IR35 investigations.
HMRC said the tests are designed to build up a picture of how a contractor’s business works and how they provide their services. The 12 tests and their scores include:
- Business premises test – Does the business own or rent business premises separately from the contractor’s home or end client’s premises? (10 points if yes)
- PII test – Does the contractor need professional indemnity insurance? (2 points if yes)
- Efficiency test – Has the business had the opportunity in the past two years to increase its revenue by working more efficiently? (10 points if yes)
- Assistance test – Does the business employ any workers who bring in at least 25% of the yearly turnover? (35 points if yes)
- Advertising test – Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising (2 points if yes)
- Previous PAYE test – During the past year, has the end client engaged you with no major changes to your working arrangements (Minus 15 points if yes)
- 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? (1 point if yes to both parts of the question)
- Repair at own expense test – Would the business have to bear the cost of rectifying any mistakes? (4 points if yes)
- Client risk test – During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover? (10 points if yes)
- Billing test – Does the business invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
- Right of substitution test – Does the business have the right to send a substitute? (2 points if yes)
- Actual substitution test – Has the business hired anyone in the previous two years to do the work it has taken on? (20 points if yes)
The scores used to assess contractors’ risk profiles are as follows:
Less than 10 points High risk
10-20 points Medium risk
More than 20 points Low risk
The HMRC guide explains that the tests are not set in stone, and are an extension of the risk-based approach to extends to all of its investigations. They already undertake risk assessments of who is most likely for investigation. The business entity tests are something you can use to self-assess to see how you score by their internal rating. But they aren’t telling us what the detailed risk criteria are because of the fear people will arrange their affairs accordingly.
The business entity tests are just a diagnostic tool. The actual application of IR35 will always come down to employment status factors that must be tested against case law going back to the 1968 Ready Mixed Concrete decision.
He explained that the new operational approach to IR35 will involve:
- Strengthening specialist teams, to reduce the length of time an IR35 enquiry takes.
- Tighter risk assessment process to select the highest risk cases for review.
- At the start of an enquiry, HMRC will take into account a contractor’s reasons why they think IR35 does not apply, along with evidence to support their view, rather than asking for a long list of documents.
- Beefed up helpline/review service for contractors staffed with specialist staff who can offer informed opinions on IR35.
And finally – BUDGET 2013 impact on IR35
- The Government will make a small amendment to the existing IR35 provisions to equalise the tax and NICs treatment of office holders, and put beyond doubt that the legislation applies to office holders for tax purposes.
Please give paul a call on 0161 962 1855 if you would like to discuss the above
