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IR35 Test

Ahead of the publication of the much anticipated ‘business entity‘ test by HMRC, Contractor Weekly has obtained details of the twelve indicators that will form the test as a whole.

None of the questions really come as any great surprise and are variations/expansions on well known historical themes. It is however the allocation of points to some of the answers to these questions that do appear imbalanced.

The tests that are guaranteed to put a freelancer at the bottom of the risk pile are those that evidence an actual lack of personal service, i.e. engaging assistance, invoking a right of substitution or sub-contracting out work.

The detailed tests together with the associated scoring system is reproduced below:

NumberTestScore
Test 1Does your business own/rent separate business premises which are separate from your home & client’s premises?Yes = +10
Test 2Do you need professional indemnity insurance?Yes = +2
Test 3Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently e.g. by finishing the work/project earlier than projected but still receiving the full agreed payment?

For example you originally agreed with the client/engager that the work would take 3 months & cost 10,000 but you finished in 2 months & still received the full 10,000 at the end of the 2 month period.

Yes = +10
Test 4Does your business engage one or more workers who generate at least 25% of your business turnover annually?Yes = +35
Test 5Have you been engaged on PAYE employment terms by your current client/end user within the last financial year with no significant changes to your working arrangements?

If you are doing the same work you should answer yes to this question. Current engager also includes working at a different location owned by your engager or working at a different company but which is connected, e.g part of the same group.

Yes = -15
Test 6Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months?Yes = +2
Test 7Does your business have a business plan with cash flow forecast that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank?Yes = +1
Test 8Would your business have to bear the cost of having to rectify any mistakes?Yes = +4
Test 9Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover?Yes = +10
Test 10Do you invoice for work carried out prior to being paid & negotiate payment terms?Yes = +2
Test 11Does your business have the right to send a substitute?Yes = +2
Test 12Has your business hired anyone in the last 24 months to do the contracted work you have taken on? This could be demonstrated by sending a substitute in your place or by sub-contracting, but in both cases your business remains responsible for the work & for paying the substitute or sub-contractor.

You can still pass this test if you had to notify the end client of the name of the individual you sent as a substitute.

Yes = +20

Why has the ‘Business Premises‘ test only been attributed 10 points? A business operating out of premises distinct from a contractors‘ residence is a major financial commitment and, if actually owned, investment. Ownership of such a business asset has always been viewed as a firm indication of a genuine business being operated and it surely deserves greater weighting being attached to it.

Advertising costs in excess of £1,200 represent significant expenditure for a small business, yet it only achieves the same score as the ‘Billing’ test. Whilst the two activities are indicators of business activity, the importance attached to invoicing is disproportionate in comparison to committing business revenues to advertising.

 

IR35 Risk

These pilot tests are designed to help freelancers gauge their IR35 risk exposure and whilst everyone would wish to fall within the low risk category, the reality is that maybe medium risk is the best that can be achieved. One incidence of a substitute being used, however, would appear to vault a contractor to the desired side of the risk fence.

As well as the ‘business entity‘ test there are a number of other interesting initiatives that HMRC will be rolling out in early May, so watch this space.

By Seb Maley

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