HMRC has published its much-anticipated IR35 business test online today, together with a set of typical IR35 scenarios, in an attempt to help taxpayers assess their risk of being caught by IR35.
Following months of speculation, the new guidance, which can be downloaded from the HMRC site here (PDF) provides an overview of HMRC’s ‘risk-based’ approach to determining taxpayers’ compliance with the IR35 rules.
However, the new document does nothing to change the underlying Intermediaries Legislation, which was implemented in 2000.
The main purpose of the guidance is to explain “how likely it is that we [HMRC] need to check whether IR35 applies to you.”
The IR35 business entity test questions
The tests themselves, drawn up in conjunction with the IR35 Forum, have been designed, and the answers weighted, to determine which ‘risk band’ an individual falls into.
As revealed last month by Company Bug, and several other new sites last month, there are 12 questions in total, covering various aspects of a contractors’ working arrangements:
Here are the questions in high-level detail. You should check the official PDF release for the full text, as many of the questions contain a number of provisos.
1. Business Premises – do you use office space separate from your residential address, or that of your end client? (‘Yes’ scores 10 points).
2. PII – Do you need to have professional indemnity insurance cover? (‘Yes’ scores 2 points).
3. Efficiency – Have you, in the past 2 years, received full payment for work which you completed ahead of schedule? (‘Yes’ scores 10 points).
4. Assistance – Does your business use any other workers – which contribute 25% or more to your turnover? (‘Yes’ scores 35 points).
5. Advertising – Have you spent £1,200 or more on advertising in the past year? (‘Yes’ scored 2 points).
6. Previous PAYE – Were you previously employed by your current client, on a PAYE basis? (‘Yes’ means you should deduct 15 points).
7. Business Plan – Does your business have a business plan, and a business bank account? (‘Yes’ scores 1 point).
8. Repair at Own Expense – Would your business have to pay to fix any mistakes you make at work? (‘Yes’ scores 4 points).
9. Client Risk – Have you been unable to recover payment for a client at some time in the past 24 months worth at least 10% of your annual turnover? (‘Yes’ scores 10 points).
10. Billing – Do you invoice before being paid, and negotiate your payment terms? (‘Yes’ scores 2 points).
11. Substitution – Are you allowed to provide a substitute if you are unable to perform your contract duties? (‘Yes’ scores 2 points).
12. Actual Substitution – Have you actually used a substitute over the past 2 years, and been responsible to supervising and paying the substitute? (‘Yes’ scores 20 points).
Business entity test scores
You are deemed to be a ‘low risk’ if you score more than 20 points, ‘medium risk’ if you score between 10 and 20 points, and ‘high risk’ if you score less than 10 points in total.
IR35 example scenarios
Six IR35 scenarios have also been included in the HMRC release, to demonstrate whether IR35 would apply or not to an assignment, depending on a number of underlying factors.
The cases of Emma, Juanita, Hamish, Barbara, Costas, and Praveen, are used to illustrate examples of when the individual/business is deemed to be inside IR35, outside IR35, borderline, or outside IR35 at first – but then subsequently caught by IR35.
The HMRC document also describes the tax authority’s approach to risk, how the new information should be used, and a glossary to commonly-used IR35 terms.
The scoring of the business test, in particular, has been widely criticised by business organisations, and it seems unlikely from first inspection that the new guidance has done anything to ‘simplify’ the way IR35 is administered.
We will publish expert guidance on how to deal with the new guidelines shortly.
You can download the original HMRC guidance document here (PDF).