Has IR35 changed recently?

Wednesday 23rd May, 2012
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The simple answer is 'No,' IR35 has not changed however HMRC have recently introduced their so called "Business Entity Tests." These Business Entity Tests are likely to be used by HMRC to target businesses that they wish to review from an IR35 perspective.

Prior to opening an IR35 enquiry into a business, you may now be given the opportunity to complete the Business Entity Tests. If you receive a high or medium risk rating HMRC may pursue their IR35 enquiry, asking for details on your assignment contracts and working practices. On the flip side, if you score a low rating, HMRC are unlikely to pursue their enquiry and will not approach you again for at least three years.

Those who fall into the low risk category are likely to feel a sense of certainty on their IR35 status which they have never had before, however some commentators believe that a high proportion of small business are likely to fall in the high or medium risk category and that the pointing system does not reflect the reality of how businesses operate.

What do you score? Download the test now!

The questions that make up the test are:

  • Does your business own/rent business premises which are separate both from your home and from the end client's premises?
    Answering yes gives you ten points.
  • Do you need and have professional indemnity insurance?
    Answering yes gives you two points.
  • Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently? For example, finishing a fixed-price contract early or providing extra workers to complete a job more quickly.
    Answering yes gives you ten points.
  • Does your business engage any workers (not directors or shareholders) who bring in at least 25 per cent of your business yearly turnover?
    Answering yes gives you 35 points.
  • Has your business spent over £1200 on advertising in the last 12 months?
    Answering yes gives you two points.
  • Has your current end client (or a company connected to the end client) engaged you on PAYE employment terms in the last 12 months with no major changes to your working arrangements? A change in site does not count as a major change.
    Answering yes gives you minus 15 points.
  • Does your business have a business plan with cash flow forecast, that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank?
    Answering yes gives you one point.
  • Would your business have to bear the cost of having to put right any mistakes?
    Answering yes gives you four points.
  • Has your business been unable to recover payment for work done in the last 24 months which is more than ten per cent of the yearly turnover?
    Answering yes gives you ten points.
  • Do you invoice for work carried out before being paid and negotiate payment terms?
    Answering yes gives you two points.
  • Does your business have the right to send a substitute?
    Answering yes gives you two points.
  • Have you actually sent someone in your place to do the work or sub-contracted the work? To score, your business has to remain responsible for the work and for paying the person who would be doing the work you took on.
    Answering yes gives you 20 points.

Test score and risk banding:


Total score Risk band

Less than 10: High risk

10 to 20: Medium risk
More than 20: Low risk

Next steps

A key point to remember is that a medium or high risk score does not put you automatically inside IR35. However it does mean that HMRC are more likely to open an IR35 enquiry against you than if you scored in the low risk category.

Despite being low in recent years, we may see HMRC open more IR35 enquiries following the introduction of these Tests and with this in mind we do recommend that you get IR35 advice on your assignments if you have not done so already. On request, you can use PayStream's internal compliance team who will review your circumstances from an IR35 perspective.

If you have any questions or queries on these Tests, or want an IR35 review, please contact the Compliance Team on 0161 929 6000 or email contractservices@paystream.co.uk.



These Business Entity Tests are likely to be used by HMRC to target businesses that they wish to review from an IR35 perspective.