With HMRC’s much discussed IR35 business test due to be published shortly, early copies of the test are unlikely to impress professional contractors, or business organisations, as from first inspection, the vast majority of individuals would be at a high risk of being caught by IR35 if the current scoring methods are retained.
The IR35 business test is the first product of the IR35 Forum, a group comprising HMRC officials and business experts, and is aimed at helping individuals and businesses assess their risk to IR35, although it is important to note that the test is purely advisory and no changes have been made to the legislation that underpins it.
Kate Cottrell from employment status experts Bauer & Cottrell emphasises this important point: “The business test is NOT there to help you determine your IR35 status. The test is there to determine your IR35 risk of investigation. Sadly it has been published by some without the all important guidance which will clearly state this.
“These tests are a minor part of the improvements being made to the administration of IR35.”
Here are the 12 questions that are expected to form the business test when it is released by HMRC, together with the proposed weighting to be assigned to each answer.
IR35 business test questions
1. Business Premises – do you own or rent a property purely for business reasons? (Yes = 10 points)
2. PII – Are you required to have professional indemnity insurance cover? (Yes = 2 points)
3. Efficiency – Can you get paid the agreed contract sum for finishing a project early? (Yes = 10 points)
4. Assistance – Do you engage at least one worker who contributes 25% or more to your annual turnover (Yes = 25 points)
5. Previous PAYE – Were you previously employed by your current client on a PAYE basis within the last financial year in a similar working arrangement? (Yes = Minus 35 points)
6. Advertising – Have you spent £1,200 or more advertising your business over the past 12 months? (Yes = 2 points)
7. Business Plan – Do you have a regularly updated business plan and dedicated business bank account? (Yes = 1 point)
8. Repair At Own Expense – Would your business have to pay for rectifying any mistakes made at work? (Yes = 4 points)
9. Client Risk – Have you been unable to collect at least 10% of annual turnover from late paying clients over the past 24 months? (Yes = 10 points)
10. Billing – Do you invoice for work before being paid, and negotiate payment terms? (Yes = 2 points)
11. Personal Service – Does your business have a right to send a substitute if you are unable to work? (Yes = 2 points)
12. Substitution – Has your business actually used a substitute within the last 24 months, or hired a sub-contractor to perform your contracted work? (Yes = 20 points)
IR35 business test – scoring
High Risk = between 0 and 10 points
Medium Risk = between 10 and 20 points
Low Risk = over 20 points
The weighting of each answer has already caused friction between business groups represented on the IR35 Forum, and HMRC, as if the scores mentioned above do form part of the published test over the next week or so, then most professional contractors will be deemed to be at a medium or high risk of being singled out for an IR35 investigation.
We will update Company Bug once the official test goes live (most likely in early May), and the strong reaction expected from business organisations.