HMRC’s new approach to IR35
In 2010 the Office of Tax Simplification argued for a suspension of IR35, but due to the potential risk of lost revenues, the Government would not agree.
HMRC has now begun the process of overhauling its operation of the IR35 regime for personal service companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated.
HMRC is bringing together specialist IR35 teams at three of its offices to pilot the new approach to investigations, which is likely to bring an increase in the number of investigations opened for IR35 reasons over the coming year.
HMRC’s new approach to IR35 includes:
• Strengthening their IR35 specialist teams to provide a consistent approach
• Improving risk assessment procedures (risk being based on the published tests) and selecting the highest risk cases for review
• Reducing the length of time an enquiry takes
• Asking the contractor why they think that IR35 does not apply, together with evidence to support their view
• Improved helpline for contractors which will be staffed with specialists who can offer informed opinions on IR35
HMRC will be assessing the risk profile of the contractor based on new tests, which can be found below with the relevant scores:
• 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 HMRC will use 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
Each of these tests are allocated points, and the total points are then utilised by HMRC to establish whether a contractor is considered high, medium or low risk.
We would stress that these business entity tests are just a diagnostic tool. Whether IR35 is applicable will still come down to employment factors that are tested against case law.
If you have any questions about IR35 and would like to talk to someone about your options, please contact us today on 02476 518 555 or 0121 711 2468.