If you are working as a ‘contractor’ in any professional capacity, you will no doubt have heard of the IR35 legislation. For those that don’t, you may remember the furor over the use of Personal Service Companies by both senior civil servants and the BBC in recent years.
Working through a limited company enabled them to make substantial tax and National Insurance Contribution (NICs) savings. However, if HMRC deem that the point of the structure was to avoid those (where they would normally be an employee), the company will be ‘caught’ by IR35, and will calculate and demand all tax and NI on payments to the director of the company.
Therefore, it is important that legitimate contractors know about the rules, and how to prove that they are outside them. To that end, HMRC have produced general guidance – the so-called ‘Business Entity Test’ to help them self-assess their risk of being inside the scope of IR35.
The Business Entity Test
The idea of the test is to get a good picture of how your business works, and how your services are provided. There are twelve sections, covered in the three parts below.
Each question has a different weighting, and by answering the questions you will get a resulting low, medium or high risk (For an in-depth calculator, please see here ).
IR35 is seldom a black & white area – there will not generally be a hard & fast rule as to whether your contract is inside or outside the scope.
In the event that HMRC look into your tax affairs, they will give more weighting to the actual working practices rather than the written terms of the contract between you and your client.
If your compliance check is referred up to a tribunal or higher courts, case law related to employment status will be relied upon by both parties when making their arguments.