HMRC has issued new guidance for consultants operating through their own limited companies to help them decide if they are at high risk of an IR35 challenge.
Why is this important ?
A successful HMRC challenge on IR35 grounds would mean that the low salary and dividend route (often with spouse as shareholder) adopted to minimise your tax would unwind and you would end up paying the tax of an employee. This would lead to a tax bill running into the thousands.
So what has changed ?
HMRC has published 12 business entity tests with a score for each item to determine the risk status for each contractor. The more points you have, the less your risk profile.
The risk position is summarised as:
<10 High Risk 10-20 Medium Risk >20 Low Risk
Given that HMRC has set up 3 dedicated IR35 centres with a total staff of 36 inspectors, which will mean more investigations being launched than over recent years, it is advisable to prepare a defence.
The guidance is HMRC’s interpretation of the law and other factors may need to be considered in your particular case. Should HMRC launch an investigation, you will be given the opportunity to set out your reasons as to why you consider yourself to be self employed and falling outside of IR35.
- Go through the questionnaire on the next page and assess yourself, using the attached HMRC notes for further explanations of each test.
- Focus on the tests which give a high positive or negative mark.
- If the risk assessment comes out as High Risk, begin to plan to reduce the risk by focussingon the higher value tests. Contact us for guidance in this situation.
The 12 tests are listed below with the points for each item appearing after the test (including negative points). Detailed notes explaining each test further can be seen in the attached HMRC document (47pages).
- Business Premises Test. Do you have a separate Business premise, if yes 10 points.
- Professional Indemnity Insurance. Do you take PI insurance out, if yes 2 points.
- Efficiency Test. Do you have the opportunity to make a profit by better managing your work,if yes 10 points.
- Assistance Test. Do you have any workers to assist in carrying out the work, if yes 35 points.
- Advertising Test. Do you spend £1200 per year on advertising, if yes 2 points.
- Previous PAYE Test. If you were previously an employee at the client’s business, if yes -15 points.
- Business Plan Test. Do you produce a business plan/forecasts etc, if yes 1 point.
- Repair at own expense test. Do you have to rectify unsatisfactory work in your own time/expense. If yes 4 points.
- Client Risk Test. Any bad debts or problems with collecting in income, if yes 10 points
- Billing Test. Do you raise invoices to client ? If yes 2 points
- Right of Substitution. Are you allowed to send in a substitute to do the work. If yes 2 points
- Actual Substitution Test. Have you actually sent in a substitute ? If yes 20 points