IR35: Business on Own Account

How relevant is the business on own account test to a one (wo)man company?

When considering the employment status of a market researcher, the judge in the case of Market Investigations Ltd v The Minister of Social Security (1969) asked the question, ‘Is the person who has engaged himself to perform these services performing them as a person in business on their own account? If the answer to that question is ‘yes’ then the contract is a contract for services. If the answer is ‘no’ then the contract is a contract of service.’

According to HMRC’s Employment Status Manual 0514, this strikes at the very core of the matter in that it distinguishes between someone who works under the control of and as part of the business of another and the person who ‘goes it alone’ and sets up business on their own account.

So what does a business look and feel like? Well that will depend on the nature of the business and the level of investment required to set up the business and keep it running. For instance, someone running a shop will have separate premises, stock, fixtures and fittings, employees etc. Such features however are unlikely to be present in a freelancer’s business. Does this mean therefore that a contractor is unlikely to pass this test when considering IR35? Not necessarily, although HMRC state that it may not be particularly helpful and that it does have its limitations and therefore it is of more help to consider the issue of control in more detail along with other status factors.

Just because a contractor may not possess the normal trappings of a business does not mean that they are not in business. In the case of Barnett v Brabyn (HMRC) (1996), Mr Barnett worked as a self-employed technician in his father’s business, LTV. He invested no capital, was provided with all necessary tools and equipment by LTV, all work done was carried out at LTV’s premises and he submitted no invoices. In terms of being in business on his own account there was nothing to run. Yet HMRC, who were arguing for self-employment,  successfully contended that it was quite possible for a person to be in business on his own account when all he supplied was his own services without providing any equipment or having any risk of loss of prospective profit.

More recently the judge in Brian Turnbull v HMRC (First Tier Tax Tribunal, 2011) found support for this argument in a case that involved a lorry driver who simply did that, drive a lorry owned by a haulier.

A number of ‘in business’ features were present in the First Tier Tax Tribunal (FTTT) case, ECR Consulting Ltd v HMRC (2011) to cause the judge to remark that the contractor’s business was indeed a genuine one and therefore “not a target of the IR35 legislation”. ECR had its own business cards and company stationary. The business was operated from a dedicated area of the freelancer’s home and ECR had its own website. ECR advertised its services and was a member of the PCG. The company retained reserves and invested in development and over the years had undertaken work on a fixed priced basis for a number of clients.

The FTTT was also persuaded that another genuine business was operated by Primary Path Ltd (2011). Primary Path actively sought work by promoting itself through its website and by monitoring the websites of those who may have been seeking the company’s expertise. In addition the company carried out some speculative work for a third party that was also involved with Primary Path’s end client and which ultimately yielded a further lengthy engagement.

Reference to HMRC’s business entity tests may only be of limited use to contractors in helping to build up a picture of a bona fide business because the higher scoring tests such as business premises are unrealistic. The same however is also true of the advertising test that only scores 2 points but requires an annual spend on advertising of £1,200 to achieve this mark. Where is the recognition for the hours of freelancers’ time spent on networking and marketing that would equally rank as genuine advertising of their business?

Even the most basic of business set ups can make a case for being in business on their own account despite what HMRC may say to the contrary.