IR35 Contractor & Freelancer Guidance
IR35 CONTRACTOR AND FREELANCER GUIDANCE
What has changed?
From April 2012 contractors are urged – actually, very well advised – to take note of the HMRC online IR35 Business Test. The test is designed to determine whether a contractor’s IR35 risk profile: is high, medium or low-riskw. The same test will be used by the tax authorities to evaluate whether or not your contractor business or individual contracts definitely fall outside IR35 or whether your status requires further investigation – even full-blown status enquiry. IR35 will apply to any services you provide that are not paid through PAYE.
Take the DNS Business Entity Test
What are the key points?
- Risk status depends on a business entity test with scores that range from low-, medium- to high-risk.
- The HMRC IR35 Helpline is 0845 303 3535
- The HMRC website page is http://www.hmrc.gov.uk/ir35/guidance.pdf
- On the phone or on the website you can request a contract review and seek advice.
- If your contract falls outside IR35 you will be issued with a unique reference number that can then be used during subsequent IR35 enquiries.
- If it is not established that you are low risk, or if you are unable to prove your low-risk status, then checks and a review will ensue to establish whether or not your business falls within IR35.
What does this mean for contractors?
- Your first priority is to have a strategy: ensure that your business contracts are drafted and your working relationships conducted in such a way that you fall into the low-risk band.
- Falling into any of the risk categories doesn’t mean you definitely fall either inside or outside IR35, they are merely indicators.
- If you are deemed high risk it’s quite likely that your IR35 Status test will be done by HMRC.
- Do the DNS Business Entity Test to establish which risk category you fall into and then keep and document all the evidence by which you arrived at your judgement.
What does the business entity test comprise?
1. Business premises
6. Previous PAYE
7. Business plan
8. Repairs at own expense
9. Client risk
11. Right of substitution
12. Actual substitution
How is the business entity test scored?
The business entity test score will determine which risk-band you fall into. We suggest that you take a business entity test for each contract:
- 1–10 is high risk
- 10–20 is medium risk
- More than 20 is low risk
What are the criteria for the scores?
Remember that risk status will depend on establishing the status of your contractor business entity and / or individual contracts.
- Business premises test = 10 points: note that it may be to your advantage to take on a lease for business premises in order to stay outside IR35.
- PII = 2 points: note that we at DNS feel that many contractors can score points on this score.
- Efficiency test = 10 points: note that it will be virtually impossible for any contractor working on a daily or hourly rate to gain points here. However, if the contract is drafted based on a fixed-price contract, then some points could be scored in this area.
- Assistance test = 35 points: note that this is an area where many contractors can score well to ensure they get a low- to medium-risk profile. DNS can help you win points here.
- Advertising test = 2 points: note that this is another area where many contractors may be able to score points. We feel that more points should have been allocated to this area of the test because business owners that invest in advertising are highly likely to be operating a business of their own.
- Previous PAYE test = minus 15 points: note that contractors who are considering contracting for a company where s/he is – or was – formerly employed should beware: this may not work to your advantage and could help produce a high-risk score.
- Business-plan test = 1 point: note that many contractors can score points here.
- Repairs at your own expense test = 4 points: note that we think if a contract is drafted and agreed correctly, many contractors can score points here.
- Client-risk test = 10 points: note that we doubt many contractors can claim points here, but DNS will do all it can to advise contractors accordingly.
- Billing test = 2 points: note again that many contractors can score points on here.
- Right of substitution = 2 points: note that providing the contract is drafted and agreed correctly, we are sure many contractors can claim points here.
- Actual substitution test = 20 points: note that few contractors will be able to claim points here, because I for one, as an accountant, have never known a contractor to send out a substitute to carry out their work.
What is the outcome likely to be?
On the whole, providing contracts are carefully drafted, many contractors will likely score around 1–15 points, which means they fall within the medium-risk profile.
What should you do now?
First, don’t worry. DNS will do all we can to ensure clients retain a low to medium-risk profile. Second, take the DNS Business Entity Test today and find out your score. Third, if you haven’t already done so, take out the DNS Tax Investigation Insurance: this is not a hard sell but honest and sound advice from your accountant.
Contractors and Freelancer’s, rest assured that with DNS you are advised and protected.