Does IR35 apply to your business?
May 23, 2012 | By Nimbus |
The economy in Brighton is thriving with new start-up businesses, the majority of which are freelancers and contractors. HMRC is keen to make sure that your business is bona fide and not disguising an alternative scenario. IR35 is the legislation that prevents someone, who if engaged directly by their end client would ordinarily be an employee, from trading through an intermediary (limited company or partnership) to pay less Tax and National Insurance. It is worthwhile spending some time making sure you are compliant, if you don’t the unpaid tax, fines and penalties could prove a nasty shock sometime in the future.
HMRC have published a risk based approach to help you assess whether your business entity is IR35 compliant. The 47 page document contains 12 questions, typical backup evidence required and 6 example scenarios to illustrate when and why IR35 may apply to an engagement.
- Business premises test – Does your business own or rent business premises which are separate both from your home and from the end client’s premises? (10 points if yes)
- Previous PAYE test – Has the current end client engaged you on PAYE employment terms, within the 12 months which ended on the last 31 March and with no major changes to your working arrangements? (Deduct 15 points if yes)
- Business plan tests – Does your business have a business plan with a cash flow forecast which you update regularly? Does your business have a business bank account, identified as such by the bank, which is separate from your personal account? (1 point for each question if yes)
- Client risk test – Has your business been unable to recover payment for work done in the last 24 months of more than 10% of yearly turnover? (10 points if yes)
- PII test – Do you need professional indemnity insurance? (2 points if yes)
- Efficiency test – Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently? (10 points if yes)
- Assistance test – Does your business engage any workers who bring in at least 25% of your yearly turnover? (35 points if yes)
- Advertising test – Has your business spent over £1,200 on advertising in the last 12 months? (2 points if yes)
- Repair at own expense test – Would your business have to bear the cost of having to put right any mistakes? (4 points if yes)
- Billing test – Do you invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
- Right of substitution test – Does your business have the right to send a substitute? (2 points if yes)
- Actual substitution test – Have you hired anyone in the last 24 months to do the work you have taken on? (20 points if yes)
The total score is used to assess your risk profile as follows:
Less than 10 points High risk
10-20 points Medium risk
More than 20 points Low risk
If selected for an IR35 enquiry, the first thing HMRC will look at is your contract. It is extremely important that this is reviewed carefully before accepting any appointment and that it fairly reflects all aspects of the proposed engagement. HMRC will not only review the contract but will look for evidence to support the tests above, so ensure you retain the necessary documents. You should review your status each time you take on a new assignment/contract.
If you would like Nimbus Accounting to review your current engagement and contract for IR35 compliance, please get in touch. We have put the above questions into a form on our website (follow this link). You can answer all the above questions and upload your supporting documents. Upon receipt we will contact you to discuss your situation, our terms and conditions and the cost/type of report we will prepare.
Nimbus Accounting is a Sussex based business with offices in Hove – we specialise in contractors and small businesses.
t: 01273 782 742 e: email@example.com