In May 2012, HMR&C published new guidelines for contractors to help them determine their status under IR35, but it seems as though they have raised more questions than they have answered.
HMRC have decided that their approach to IR35 should be risk-based and the questions that they have devised will be used to determine whether a PSC (Personal Service Company) is low, medium or high risk. Obviously those that are considered to be high risk will be the most likely to have an IR35 review.
HMRC have also stated that they will be writing to those people that they feel IR35 may apply to and be asking them whether or not they have considered their position. If they receive the reply that the person believes themselves to be outside IR35, HMRC will then ask them to prove it by producing evidence. If you fall under the medium or high risk categories, there is a risk of an IR35 review and HMRC have emphasised that ‘this risk is not low’.
In June 2012, ContractorUmbrella were made aware of the evidential documents that HMR&C would require from contractors:
- Copies of contract reviews that have been undertaken by IR35 experts;
- Copies of invoices that show fluctuating fees billed thus helping to demonstrate that the freelancer had a degree of control over the time they spent carrying out the services;
- Copies of any business tenders;
- Copies of business insurance schedules;
- Documentation in the form of letters or e-mails that demonstrate an absence of control being exerted over the contractor, lack of personal service etc.;
- Details of any substantial investment in business assets, training, advertising and marketing;
- Details of any occasions a contract was terminated early by either party or when contractors were asked to stay away from an end client site for whatever reason whilst permanent staff remained in place.
Although the new business entity tests will be used to determine how the business operates overall, each individual engagement will need to be considered in terms of IR35. There are 12 tests in all and they ask at least one question for each of the following categories. Points are awarded according to your answers:
- Business premises – do you own or rent premises that are separate from your home?
- PII – do you have Professional Indemnity Insurance?
- Efficiency – has your business had the opportunity in the last 24 months to increase business income by working more efficiently?
- Assistance – do you engage workers who bring in at least 25% of your turnover?
- Advertising – do you spend at least £1,200 per year on advertising?
- Previous PAYE – have you worked, as a PAYE employee, for your current client within the last 12 months? (If you answer yes, you will score minus 15 points)
- Business plan – do you have a business plan with a regularly updated cash flow forecast?
- Repair at own expense – would your business have to bear the cost of having to put right any mistakes?
- Client risk – has your business failed to recover payment of more than 10% of turnover in the last 24 months?
- Billing – do you invoice for work carried out and negotiate payment terms?
- Right of substitution – do you have the right to send a substitute in your place?
- Actual substitution – have you hired anyone in the last 24 months to work in your place?
In order to be considered a low risk and therefore less likely to be subjected to an IR35 investigation you will need to get more than 20 points; if you score less than 10 you will be high risk.
These tests will obviously only apply if you have a Limited Company; working through an umbrella company you are perfectly safe from IR35.
If you would like more information on working with ContractorUmbrella our specialist advisors will be pleased to help you. Please call 01206 713680 or email us at firstname.lastname@example.org