IR35 business entity tests published

HMRC has begun the process of overhauling its operation of the IR35 regime for personal services companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated.

The overhaul will mean an increase in IR35 investigations, the tax department confirmed.

As expected following leaks last month, the 12 business entity tests set out in HMRC’s 47-page intermediaries legislation guidance note are illustrated by six example scenarios. 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 testss include:

• Business premises test  - Does the business own or rent business premises separately from the contractor’s home or end client’s premises? 
• PII test - Does the contractor need professional indemnity insurance? 
• Efficiency test - Has the business had the opportunity in the past two years to increase its revenue by working more efficiently?
• Assistance test - Does the business employ any workers who bring in at least 25% of the yearly turnover?
• Advertising test - Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising
• Previous PAYE test - During the past year, has the end client engaged you with no major changes to your working arrangements
• 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?
• Repair at own expense test - Would the business have to bear the cost of rectifying any mistakes?
• Client risk test - During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover?
• Billing test - Does the business invoice for work carried out before being paid and negotiate payment terms?
• Right of substitution test - Does the business have the right to send a substitute?
• Actual substitution test - Has the business hired anyone in the previous two years to do the work it has taken on?

The HMRC guide explains that the tests are not set in stone, and are an extension of the risk-based approach to extends to all of its investigations.

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