New IR35 business test and IR35 scenarios go live

After weeks of speculation, HMRC has published new IR35 guidance, including a business entity test and a set of typical IR35 scenarios.

Background

The new guidance has been released following months of discussions held by the IR35 Forum, a group of industry experts and HMRC officials tasked with improving the way IR35 is currently administered.

Significantly, the major business groups that were involved in these discussions have voiced their disquiet over today’s publication, particularly in the way the answers to the business test have been weighted.

In fact, most IR35 Forum members feel that the new guidance has made IR35 more complex, rather than providing simplification, which was the whole point of the exercise in the first place.

Chairman of contractors’ group, PCG, Chris Bryce, summed up the common mood:

“HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35.”

IR35 Business Tests

The test itself comprises twelve individual questions, ranging from whether or not you have professional indemnity insurance in place, to whether or not you have used a substitute for your contract work over the past 24 months.

The answers to each question are weighted from 35 points (if your business employs any workers), to a mere 1 point if you have a business plan and dedicated business bank account.

Once you add up your total score, you can work out whether you are regarded to be at a ‘low’, ‘medium’, or ‘high’ risk of being targeted for an IR35 investigation.

It is unsurprising that the scoring has been a major point of contention by IR35 Forum members, as many taking the test would score under 10 points – and would typically be at a ‘medium’ or ‘high’ risk.

In the document (Page 10), HMRC states: “If you prove to our satisfaction that you are outside IR35 or in the ‘low risk’ band, then we will close our IR35 review.”

In an interesting summary of the new tests, legal expert Roger Sinclair commented: “I predict that there will now be considerable efforts shown by many contractors to bring themselves into that magic 20+ zone – and to keep themselves in it.”

Typical IR35 Scenarios

Included in the same PDF document, HMRC has also published 6 typical IR35 scenarios, proving examples of situations when an individual would be deemed to be inside or outside the IR35 rules, borderline, or when an assignment starts off outside IR35, only to become IR35-caught due to a change in circumstances.

You can download the full PDF guidance here.

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