Business Entity Tests for IR35 Status Available

In May 2012 the HMRC brought out its new "Business Entity Tests" as part of the “Intermediaries Legislation” (IR35). IR35 has always been a grey area with respect to assessing a person’s employment status, but the Revenue has now tried to define more accurately who is, or is not, an “employee” of the business they are working for.

The Revenue has introduced 12 tests, with points scoring attached to each, which will be applied to individuals who provide their services without being paid as an employee. These individuals will use either a limited company or a partnership as an intermediary to provide services to their clients. The tests to be applied are;

1. Business premises - 10 points - Does your business own or rent premises which are separate from the home and end clients’ premises?
2. PII - 2 points - Do you need professional indemnity insurance?
3. Efficiency - 10 points - Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently?
4. Assistance - 35 points - Does your business engage any workers who bring in at least 25% of your yearly turnover?
5. Advertising - 2 points - Has your business spent over £1,200 on advertising in the last 12 months?
6. Previous PAYE - 15 points deducted - Has the current “end customer” engaged you on PAYE employment terms within the last 12 months ended 31 March, with no major changes to working arrangements?
7. Business plan - 1 point - Does your business have a business plan, separate cashflow forecast which is updated regularly, and a separate business bank account?
8. Repair at own expense - 4 points - Would your business have to bear the cost of having to put right any mistakes?
9. Client risk - 10 points - Has your business been unable to recover payment for work done in the last 24 months?
10. Billing - 2 points - Do you invoice for work carried out before being paid and negotiate payment terms?
11. Right of substitution - 2 points - Does your business have the right to send a substitute?
12. Actual substitution - 20 points - Have you hired anyone in the last 24 months to do the work you have taken on?

The higher the score, the less likely it is that HMRC can make a case that you are really an employee of the business, but every case depends on its own facts and just because you are in the "medium risk" band or the "low risk" band, does not automatically mean that you are outside IR35. And just because you are in the "high risk" band or "medium risk" band does not automatically mean that you are within IR35.

If you are concerned about your own employment status and would like a review, please contact Daniel Cole on 01628 507649 or email daniel.cole@haleandco.co.uk or Chris Krol on 01628 626333 or email chris.krol@haleandco.co.uk.