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The guidance starts by saying 'As a small business, you need to have certainty about IR35. You need to know whether IR35 applies to you'.
The guidance then goes on for 50 pages, gives seven theoretical examples of 'inside IR35', 'outside IR35', 'borderline IR35' and 'inside then outside IR35'; a series of tests such as advertising, substitution, and the controversial 'risk' test where you score better if you've have a bad payment recovery record. The document also cautions that it is not'a comprehensive guide to IR35'.
Summary
The following is a summary of the IR35 Business entity tests - example scenarios
What is IR35?
The guidance begins with a brief overview of IR35 and further information about contacting HMRC's IR35 helpline and warns:
"IR35 can apply in any business sector. And it makes no difference whether the end client is carrying on a business."
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"The helpline and review service are staffed by HMRC specialists in IR35. Both are independent of our compliance teams – if you ask them about IR35, they will not pass on what you tell them to other people in HMRC.
"The specialists can review a contract for you if you want certainty about your position. If you decide to use the contract review service, and we conclude that your contract is outside IR35, we will give you a certificate with a unique number. This certificate will be valid for three years."
The document explains the three 'risk bands' - low, medium and high which grade how likely you are to be the subject of an IR35 investigation and what your position is if you fall into a category. In the event of an investigation you will have to provide to HMRC's satisfaction that you are in the 'low' risk and they will then suspend the enquiry.
The business entity tests
The tests were devised by the IR35 Forum which comprises representatives of freelancer trade groups, agency bodys, industry and HMRC officials. The idea of a range of tests was introduced by freelancer trade group, the PCG, as an alternative to total abolition when the Office of Tax Simplification (OTS) first considered the future of IR35. However, the tests - along with abolition - were rejected in that format in favour of improving the administration of IR35, which is what this guidance intends to achieve.
The tests are voluntary and HMRC cannot make you take them or, if you do take them, you do not have to reveal to HMRC which band you are in.
There are 12 subject areas in the tests in Chapter 4 - each one carrying a points score. The final tally reveals your risk: less than 10 points = high risk; 10 to 20 = medium risk; and more than 20 = low risk.
Evidence is needed to support your answers. In summary the tests and scores are:
- Business premises - do you rent/own business premises outside your home? (10 points for a Yes)
- PII - do you need Professional Indemnity Insurance? (2 pts)
- Efficiency - can you increase your income through efficient working, eg finishing fixed price contracts early (10 pts)
- Assistance - do you employ anyone? (35 pts)
- Advertising - have you spent more than £1,200 on advertising in the past year (2 pts)
- Previous PAYE - have you been an employee of your client (minus 15 pts)
- Business plan - do you have a business plan and a business bank account (1pt for a yes to both)
- Repair at own expense - do you have to put errors right at your own expense (4 pts)
- Client risk - have you been unable to recover more than 10 per cent of your yearly turnover (10 pts)
- Billing - do you invoice for work carried out before being paid and negotiate payment terms? (2 pts)
- Right of substitution - do you have a right to send a substitute? (2 pts)
- Actual substitution - have you substituted? (20 pts)
Example scenarios
Chapter Five onwards has several scenarios where IR35 may or may not apply. Long-time IR35 followers will remember a similar exercise when the original proposals came out.
- 'Emma’ Outside IR35
- ‘Juanita’ Borderline
- ‘Hamish’ Outside IR35
- ‘Barbara’ Within IR35
- ‘Costas’ Outside IR35 at first, then within IR35
- ‘Praveen’ Main contract within IR35
The scenarios factor in issues such as personal service, control, and financial risk when reaching an IR35 conclusion.
Shout99 will be continuing to provide news and expert comments on the new guidance - so keep checking the website for updates
Related stories on Shout99
For general coverage of IR35 policy and cases, see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2012
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