What’s your IR35 business entity test score?
HMRC is increasing the level of investigations it makes into personal service companies and partnerships being used as an intermediary to provide services to clients based on how you score in a “business entity test”.
More IR35 Checks
“Intermediaries legislation”, better known as IR35, is intended to stop people from working for clients on better tax and NIC (National Insurance Contribution) terms through a company structure than they would have received as employees doing the same work.
HMRC is stepping up the number of IR35 investigations it makes, ostensibly because it has improved its analysis capability and will be able to more effectively select cases that it can win. Cynics might also suggest that they are under pressure to raise more money for the exchequer.
Business Entity Testing
A set of “business entity” tests have been made available, which are intended to allow businesses to evaluate the risk of being IR35 investigated and provide a score that is used to assess the level of risk.
There is no obligation to either take the tests or reveal the results to HMRC, however Andrew Smith, a Director at Lewis Smith & Co. believes that there is an ulterior motive:
“HMRC know that business owners worry about dealing with them. We see these tests as part of a wider set of “scare tactics” that seem designed to persuade small businesses that they aren’t conducting their tax affairs correctly. “
In actual fact Lewis Smith & Co. would advise small businesses to work through the business entity tests (which are available in PDF from HMRC) because they do offer an insight into your potential IR35 status. It is important, however, to recognise that the questions and the scoring of the risk factors seem to be deliberately weighted to making all contractor businesses liable for investigation. Remember that the legislation hasn’t changed so getting a high score in the test does not necessarily mean that you are IR35 non-compliant.
12 Business Areas
The tests cover 12 separate business areas as follows:
- Business premises test – Does the business own or rent business premises separately from the contractor’s home or end client’s premises? (10 points if yes)
- PII test – Does the contractor need professional indemnity insurance? (2 points if yes)
- Efficiency test – Has the business had the opportunity in the past two years to increase its revenue by working more efficiently? (10 points if yes)
- Assistance test – Does the business employ any workers who bring in at least 25% of the yearly turnover? (35 points if yes)
- Advertising test – Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising (2 points if yes)
- Previous PAYE test – During the past year, has the end client engaged you with no major changes to your working arrangements (Minus 15 points if yes)
- Business plan test – Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account? (1 point if yes to both parts of the question)
- Repair at own expense test – Would the business have to bear the cost of rectifying any mistakes? (4 points if yes)
- Client risk test – During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover? (10 points if yes)
- Billing test – Does the business invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
- Right of substitution test – Does the business have the right to send a substitute? (2 points if yes)
- Actual substitution test – Has the business hired anyone in the previous two years to do the work it has taken on? (20 points if yes)
HMRC has declared three risk bands based on the total score from all of the tests:
20 or moreLow Risk
10 to 20Medium Risk
Less than 10 High Risk
What To Do Next
If you have taken the tests and are concerned about your risk factor score or if you have received a letter announcing an investigation, then Lewis Smith & Co. can help. We work with a large number of contractor businesses in areas such as IT, construction and engineering and have a great deal of experience in helping people with IR35 issues.
You can arrange a free, confidential appointment with Andrew Smith or Craig Beale by calling 01384 235549 or emailing firstname.lastname@example.org.
Lewis Smith & Co. – Specialist accounting support for technology companies