Money Matters - Summer 2012

Caught in the IR35 tax net?

HMRC has published guidance setting out various business entity tests aimed at helping taxpayers decide if they are at risk of being subject to IR35. The tests build up a picture of how a business works based on a points-scoring system:

  • Do you have business premises that are separate from your home and from your client’s premises? Yes = 10 points
  • Do you need professional indemnity insurance? Yes = 2 points
  • Has your business had the opportunity in the previous 24 months to increase business income by working more efficiently? Yes = 10 points
  • Does your business engage workers who bring in at least 25% of your annual turnover? Yes = 35 points

boy on a beach

  • Has your business spent over £1,200 on advertising during the previous year? Yes = 2 points
  • Has your current client employed you as an employee subject to PAYE during the 12 months ending on the previous 31 March with no significant changes to the working arrangements? Yes = deduct 15 points
  • Does your business have both a regularly updated business plan and a separate business bank account? Yes to both = 1 point
  • Does your business have to bear the cost of having to put right any mistakes? Yes = 4 points
  • Has your business been unable to recover payment for work done during the previous 24 months amounting to more than 10% of your annual turnover? Yes = 10 points
  • Do you invoice for work carried out before being paid and also negotiate payment terms? Yes = 2 points
  • Do you have the right to send a substitute in your place? Yes = 2 points
  • Have you actually hired anyone in the previous 24 months to work in your place? Yes = 20 points

A score of less than 10 indicates high risk, while medium risk is 10 to 20 and there is a real chance that HMRC will check whether IR35 applies. A score above 20 is considered low risk, and if this is your score you should gather supporting evidence for each test in your favour. There are indications that HMRC will increase the number of IR35 compliance checks, and it has already started sending out letters to contractors.