IR35 Guides - Are you inside or outside IR35?

As the contents of the proposed IR35 business test appear online on several contractor news sites, it is easy to see why a rift has formed between HMRC and business groups, as it would seem that most contractors would face at least a medium risk of an IR35 investigation.

Participants are provided with 12 questions. The answers are weighted according to the the importance HMRC have attached to each question. You then add up your combined score to determine your 'risk' of being an IR35 candidate.

Test purely to demonstrate HMRC's risk profile

It is worth noting that this new test makes no difference at all to the Intermediaries Legislation itself; it is purely aimed at 'helping' people determine their risk of investigation, as Kate Cottrell from Bauer & Cottrell points out:

"As the IR35 legislation has not changed it is business as usual for everyone when considering their IR35 status. Those that need to consider IR35 are at risk of an IR35 investigation and all the test does is demonstrate HMRC's risk profile and how you would be viewed by them. It will still be necessary for everyone, irrespective of their level of risk, to provide evidence of their status in order to win their case. These tests are a minor part of the improvements being made to the administration of IR35."

IR35 Business Test Questions

The full questions are expected to be published officially in early May, however the substance of the main questions are expected to be as follows:

1. Do you own or rent separate office premises for your business? (Yes = 10 points)

2. Do you need professional indemnity insurance? (Yes = 2 points)

3. Have you had the chance to finish a project early over the past 2 years, but still received the full agreed payment? (Yes = 10 points)

4. Do you employ any workers who contribute at least 25% of your turnover? (Yes = 35 points)

5. Were you previously a PAYE employee for the client you are now a contractor for in the last financial year? (Yes = Minus 15 points)

6. Have your business spent over £1,200 on advertising in the past year? (Yes = 2 points)

7. Do you have a regularly updated business plan, and a dedicated business bank account? (Yes = 1 point)

8. Would your business be financially liable for fixing any mistakes made? (Yes = 4 points)

9. In the past 2 years, have you been unable to recover payment in excess of 10% of annual turnover? (Yes = 10 points)

10. Do you invoice for contract work in advance or payment, and negotiate payment terms? (Yes = 2 points)

11. Do you have the right to send a substitute if you are unable to work? (Yes = 2 points)

12. In the past 2 years, have you actually supplied a substitute or hired a sub-contractor, while you remain responsible for their work and payment? (Yes = 20 points)

IR35 risk scores

0-10 points = High Risk
11-20 points = Medium Risk
21 points or more = Low Risk

Who can actually 'pass' this test?

From initial inspection, almost all contractors would be placed in the 'Medium' or 'High' risk categories, due to the current scoring methods imposed by HMRC.

For example, many contractors may only be able to pick up points for having PI insurance (2 points) and having the right to a substitute but not yet implementing this right (2 points) - a mere 4 points in total.

Clearly, if the scoring used once the test goes live remains unchanged, it will provide a hopelessly unrealistic guide to IR35 risk, when in the real world, the majority of contractors will not be caught by IR35.

As a result, we would expect to hear some strong comments from business groups once the IR35 business test has been published officially - most likely on May 7th.