DNS IR35 Business Entity Test
From April 2012 contractors are advised to do the DNS online Business Entity Test to determine whether their IR35 risk status is high, medium or low. Something similar will be used by the tax authorities to evaluate whether or not your contractor business or individual contracts definitely fall outside IR35.
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 thenbe 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.
Repairs at own expense
Right of substitution
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
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 alease 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.
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 youradvantage and could help produce a high-risk score.
PBusiness-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.