IR35: Virtual Office, Virtual Points?

Does a virtual office count as business premises?

Virtual offices have been around for nearly 20 years now, with the first commercial application taking place in 1994 in the U.S.A. But can contractors use them to achieve a ‘low risk’ score on the business entity test?

A product of technological innovation and the Information Age, the virtual office combines off-site live communication and address services allowing the user to reduce typical office overheads without having to compromise business professionalism.

Generally, a virtual office will provide the following key features:

• Telephone answering
• Business mailing address
• Mail forwarding
• Meeting room hire

Depending on the geographical location of the contractor’s business and the facilities opted for, monthly leasing costs may vary but may still be conservative.

To score 10 points under the 'Business Premises test' that forms part of the business entity tests, a freelancer's business must own or rent business premises which are separate both from the contractor's home and from the end client’s premises. For the purposes of this test, it makes no difference who owns or rents the business premises – the individual contractor or their company.

The evidence required to satisfy this test is:

1. Address of business premises
2. Lease or contract for business premises
3. Utility bills for business premises
4. Home address
5. Client’s address

This is where (3) could present a problem, in that the contract for the use of a virtual office may not specify or identify heat and light, water and telephone costs. All well and good if they are stipulated as this will enable the freelancer to secure the points, but if not then this could thwart them in their bid to become IR35 low risk. Nevertheless, a lengthy lease period for the virtual office will help to demonstrate both the existence of a genuine business and a financial risk.

Whilst a virtual office may not be what HMRC had in mind when compiling the 'Business Premises test', the relevant guidance does not discriminate against these facilities and if all the evidence can be lined up then there is no reason why such an arrangement cannot earn contractors those precious points. It is worth noting that, if a contractor is subject to an IR35 review from HMRC and can demonstrate that they are ‘low risk’, the Revenue should shut down the enquiry straight away.

You can see the business entity test in full here. A score of 20 or more is considered ‘low risk’.