IR35 TEST DETAILS REVEALED (23/05/12)
When the head of the Student Loans Company was found to have avoided paying thousands of pounds in income tax due to a loophole that meant he was paid through a limited company, it was something of an embarrassment for the government who have criticised these types of arrangements.
Ed Lester was forced to pay tax and National Insurance contributions from his pay packet after it emerged that his daily fee went to a private company he owns - rather than to him personally. It meant he was able to pay corporation tax of 21 per cent instead of income tax of up to 50 per cent.
HM Revenue and Customs has for years attempted to clamp down on these types of arrangements through the IR35 rule. The IR35 rules are highly complex guidance to try and identify where individuals, who would otherwise be employees, are trading through a limited company.
HMRC is in the process of revising the widely-criticised IR35 rules and in the next stage of this process, has published a series of tests to identify arrangements where there is a risk the IR35 rules will apply.
HMRC said the tests are designed to build up a picture of how a contractor’s business works and how they provide their services. The tests and their scores include:
- 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)
The scores used to assess contractors’ risk profiles are as follows:
Less than 10 points High risk
10-20 points Medium risk
More than 20 points Low risk
If you have any concerns about how this may affect you and your business, then please contact us on 01227 454627 or email firstname.lastname@example.org