PayMatters Accountancy Services - May 2012 Update

18 May 2012

IR35 has been in the news again this week with HMRC introducing a new Business Entity Test and also giving example scenario’s of what to expect if they were to perform an IR35 review on you or your business.

It is important to point out that the legislation surrounding IR35 remains unchanged so if you were outside the scope of IR35 previously then you still will be.

IR35 was introduced to stop the use of an intermediary, usually a limited company or partnership, to "disguise" an employment relationship between the contractor and their end client. By using an intermediary, the contractor could receive income as a mixture of wages, expenses and dividends which resulted in an increase to net pay when compared to being a direct employee of the client.

IR35 ensures only those individuals who would be genuinely self-employed, receive the tax/NIC benefits of being in business and treats those individuals who are "disguised" employment the same as though they were actually employed.

What the guidance sets out to do is to introduce a “Business Entity Test” that will show how at risk you and your business are of an IR35 review and if subject to a review what you may need to provide to help justify your being outside the scope of IR35.

The guidance also gives 5 examples showing how HMRC would decide if they consider you to be caught by IR35 or not. The key example is Barbara who is caught by IR35.

HMRC Business Entity Test

The test is designed to return a score that will say if you are at a High, Medium or Low risk of an HMRC IR35 review.

HMRC are hinting that they will be writing to businesses they think may be medium to high risk to ask if they have considered IR35. It is then up to you to show that you are low risk or provide additional information for HMRC to make a decision. Historically the chance of being selected for an IR35 review has been very low.

The 12 questions on the Business Entity test are:

Business Premises Test- 10 points if separate from your home;

PII (Professional Indemnity Insurance) - 2 points if you need PII;

Efficiency Test - 10 points if in the last 2 years you have been able to make more money by being more efficient ie getting paid full contract value even if finished early;

Assistance Test - 35 points if others bring in more than 25% of your company’s income;

Advertising Test - 2 points if you spend more than £1,200;

Previous PAYE Test - minus 15 points if you were previously employed by the end client in the last year;

Business Plan Test - 1 point for having a regularly updated business plan and cashflow forecast and 1 point for having a business bank account);

Repair at Own Expense Test - 4 points if contract says you have to rectify any mistakes at your own cost;

Client Risk Test - 10 points for having any bad debts in last 24 months that accounted for 10% of your turnover;

Billing Test - 2 points for invoicing before payment and negotiating payment terms;

Right of Substitution Test - 2 points if contract includes the right to provide a substitute to perform your work; and

Actual Substitution Test - 20 points if in the last 2 years you have actually employed someone as a substitute.

A score below 10 will return a score of HIGH risk, between 10 and 20 MEDIUM risk and greater than 20 LOW risk.

Most contractors working through their own limited company are expected to fall into the High or Medium risk categories.

The full guidance is available at: http://www.hmrc.gov.uk/ir35/guidance.pdf

If you are worried about IR35 although PayMatters are unable to provide technical IR35 advice we have managed to negotiate reduced rates from the industry’s IR35 experts Bauer & Cottrell. Bauer & Cottrell can review your contracts and working practices to ensure you stay IR35 compliant.

Please see: http://www.bauerandcottrell.co.uk

Alternatively they can be contacted by:

Email: info@bauerandcottrell.co.uk or

Telephone: 01525 406622

Please ensure you say you are a client of PayMatters to receive a discounted rate on any work they perform for you.

IR35 Insurance is also available that in the event of an HMRC Investigation you would receive initial free legal support. The cover doesn’t however cover the cost of any additional tax you may owe and is unlikely to cover the cost of any appeal it should not therefore be seen as solution to IR35 compliance.

Please note that HMRC also offer free advice and will if requested review your contracts to confirm whether they consider you to be outside the scope of IR35.

For further information: http://www.hmrc.gov.uk/ir35/assistance.htm

PayMatters can be contacted on 0800 121 6513 or enquiries@paymatters.co.uk