Q. I am a contractor operating as a limited company. I have heard one of the best ways to ensure that you are operating as your own business is by taking a financial risk. How can I demonstrate this?
A. Taking a financial risk is a good indication of operating as your own business. I am going to provide two examples of how you can demonstrate that you are taking a financial risk and also obtain a score of a combined total of 14 points on the business entity test.
Repair your own expense – 4 points in the business entity test:
Being an independent contractor, like any other business you are taking financial risks, such risks include putting right any mistakes you may have made. Should you be financially responsible to correct faulty work. Evidence to support this includes the following:
- Clause in contract
- Details of what could go wrong
- Details of how you would put it right
- Details of the cost to your business of putting mistakes right.
Client risk – 10 points on the business entity test:
Another risk of being in business is being unable to recover payment for work done if the client has insufficient funds to pay you. If this has happened in the last 24 months in excess of 10% of your annual turnover, this is worth 10 points on your BET. The reason this is scored so high is because it demonstrates a financial risk, which is a strong indication of being in business on your own account. The evidence that can be used to support this is:
- Accounting records showing write-offs
- Copies of letters and emails between intermediary and end client
- Copies of letters and emails about legal action for recovery
The financial risk test is ludicrous.
By granting credit to a third party your business is taking a risk – the fact that you have not incurred a loss does not mean that a risk has not been taken. If you were to take out credit insurance to mitigate this risk, would it increase or decrease your IR35 standing in the view of HMRC?
Having worked on a contract where I had to grant 60 day payment terms in order to secure it, the risk was a very real one for me.
There is a fundamental difference between contractors and employees – in the event of insolvency an employee is a preferential creditor with substantial protection whereas the contractor will be an unsecured creditor likely to receive pennies in the pound.