HMRC have published guidance for contractors and freelancers to use to assess whether they are at a high, medium or low risk of HMRC checking their IR35 status – the guidance is NOT intended to indicate whether a contract falls within the IR35 rules.
HMRC now assess the business and the “business entity tests (BET)” are designed to filter out the low risk entities.
Remember that IR35 looks at each contract separately. Therefore although a business entity may be assessed as low risk it does not mean that each contract is outside IR35, however the BET will determine the likelihood of HMRC opening an enquiry.
The BET is made up of 12 questions which are weighted and scored and the total score determines whether the business/entity is high, medium or low risk.
|Less than 10 points||High risk|
|10 to 20 points||Medium risk|
|More than 20 points||High risk|
1. Business premises test
Do you own or rent a separate business premises (rather than working from home or at a client’s)? Passing this question scores 10 points and immediately put the business into medium risk
2. Professional Indemnity Insurance (PII)Test
Do you need PII (as opposed to choosing it)? The need must be evidenced score two points if you need PII
3. Advertising Test
Has the business spent over £1200 on advertising? Yes for two points
4. Efficiency test
Whether or could the business have increased profits by taking on additional contracts or finishing a fixed-price contract early? Score 10 points if the answer is yes (and you have evidence)
5. Assistance test
Do other workers (not partners, directors or shareholders) bring in at least 25% of the turnover? Passing this question gives 35 points and immediately places the business/entity in the low risk category
6. Previous PAYE test
Aimed at the arrangement where an employee stops work for an employer on Friday and (say) starts work Monday as a contractor. This question scores minus 15 points
7. Business plan test and Billing test
If the business has a dedicated business bank account and a business plan. Earn one point
Advance billing and negotiating payment terms scores two points
8. Repair at own expense test and Client risk test
These are part of the financial indicator tests. Do you have to make good any mistakes in your own time and at your own expense? Score four points if your answer is yes
Do you have any bad debts or delays in obtaining payment from customers? Score 10 points if the answer is yes
9. Right of substitution test and Actual substitution test
A genuine right to send a substitute earns two points
If the business has actually used a substitute score 20 points
To see how these tests apply to some contractor companies check out the examples on the case studies blog following.
HMRC are withdrawing the business entity tests from April 2015.