What Is An IR35 Business Entity Test?

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What Is An IR35 Business Entity Test?

Uncategorised Author: Admin


IR35 can be quite a confusing subject for many contractors, as employment status isn’t always that simple, making it difficult to work out exactly where you stand with the legislation – whether you fall ‘inside’ or ‘outside’.

Inside Vs Outside

It is HM Revenue and Customs that determines which way your practices fall, and if you are investigated they can check whether your contract truly reflects your working practices, so you must be honest about the way that you are running your business.

If you fall inside IR35, then HMRC will view you as having the same risk, responsibility, control and liability as a permanent employer, which means that you will not be able to claim certain expenses and will have to pay full tax and National Insurance contributions – basically, if you are classed as ‘outside’ you will end up taking home more of your earnings.

IR35 Business Entity Tests

In May 2012, HMRC introduced voluntary IR35 business entity tests to reduce the confusion surrounding IR35 and to help contractors to be aware that HMRC could question whether their contract and day-to-day practices fall inside or outside IR35.

The twelve question tests are completely voluntary and are divided into the following sections:

  • Business Premises
  • PII
  • Efficiency
  • Assistance
  • Advertising
  • Previous PAYE
  • Business plan
  • Repair at own expense
  • Client risk
  • Billing
  • Right of substitution.

Depending on how you answer the questions you will be rewarded points, which will determine your status.  The results are made up of three risk bands:

  • Low risk (more than 20) – which means that there is a low risk that HMRC will check whether IR35 applies
  • Medium risk (10 to 20) – a medium risk you will be checked, as there are some pointers that IR35 applies
  • High risk (Less than 10) – you are more than likely to have an IR35 review.

If your results come back as being at ‘high risk’ and you believe this to be incorrect, HMRC will ask you to prove this.  For example, one of the questions is: “Do you invoice for work carried out before being paid and negotiate payment terms?” – The evidence would be copies of invoices and emails or letters about billing.

The IR35 test is simply there as a guide, so if you do fall in the medium risk band, it’s more than likely that you will need to be more thorough with looking into your practices.  This is where a contractor accountant can help with all of your questions regarding the legislation.