Business Premises Test: Why Bother?

Since the publication of the 'Business Entity Tests' a few weeks ago some contractors have wasted  little time in applying some creative thinking as to how to pass the business premises test thereby achieving 10 points. When added to the 11 points that contractors should be able to ordinarily score this would ensure a low risk rating.

It would be fair to say that the majority of contractors do not own or rent separate business premises because their enterprises can be satisfactorily run from home. To suddenly acquire premises distinct from a place of residence and the end client's site for the sake of a 10 point score would not be financially expedient.

A couple of ideas that have already been muted are renting space at the offices of a contractors accountants for a monthly fee or renting space of a parents home for either a peppercorn rent or free of charge.

The business premises test simply asks whether a business owns or rents business premises and requires, amongst other things, a lease or contract for business premises evidence. It makes no mention of the business operating out of those premises so in theory a contractor could pay rent to simply occupy premises. There is however another tax issue to consider here, ie the corporation tax relief for such expenditure. If the expense is not incurred wholly and exclusively for the purposes of the trade then there can be no corporation tax deduction or there maybe partial relief.

If HMRC see no deduction being claimed when taking up an IR35 review they will probably ask why and could seek to discredit the evidence but, at the moment, that is not what the guidance says.

At the moment the IR35 guidance is all new and will take some time to bed in but there may be a warning contained in page 11 of the guidance which states the tests and scenarios are not etched in stone and “we may update them in response to feedback and business changes.”  There is a likelihood therefore that if HMRC become aware of artificial arrangements that are simply put in place to circumvent any of the tests and that bear no reality to the situation, they will tighten the guidance thereby rendering previous arrangements obsolete.

Even where a contractor does achieve a low risk score this does not automatically put them outside of IR35, as they still have to provide evidence to the satisfaction of HMRC.

A freelancer has to decide therefore whether it is really worth expending monies unnecessarily just for the sake of achieving 10 points when it would be more efficient to utilise a substitute just once, thus scoring 20 points. At the moment, it's a case of you pays your money, you takes your choice.