Here are some useful case studies from HMRC on how to apply their Business Entity Tests (BET) and IR35 to certain contracts…
Case Study One – Emma
Emma is a sole director, shareholder and worker of E Ltd.
Emma contracts with an agency, which in turn contracts with the end client.
The engagement has been in three six month contracts, a total of 18 months. During this time E Ltd has not undertaken any other work.
The client makes progress payments and makes the final payment when the projects have been completed. The contract makes no provision for overtime but special (unsocial hours) payments can be negotiated and agreed between E Ltd and the end client.
The contract between the agency and E Ltd allows E Ltd to send a substitute, providing this is acceptable to the end client. The contract between the agency and the end client forbids substitution.
Emma is highly skilled and is given a free rein on how to work. E Ltd has an ISO certificate and PII cover. It has invested in training and pays for professional advice and accounting.
The end client provides all the equipment and Emma reports to a manager every Friday. Emma tells the client if she cannot attend out of courtesy.
Conclusion
If the end client had contracted directly with Emma she would have been self-employed so the contract is outside IR35. Using the business entity tests E Ltd is medium risk, see the IR35 risk assessment – Emma.
Case Study 2 – Juanita
Juanita is a sole director, shareholder and worker of J Ltd.
Juanita contracts with an agency, which in turn contracts with the end client.
The end client has entered into a series of contracts with J Ltd for various projects, each project lasts between 6-12 months. Juanita has turned down other contracts for this same end client and during this time J Ltd has not undertaken any other work.
J Ltd charges by the hour and invoices monthly.
The contract between J Ltd and the agency states that J Ltd can offer a substitute. Juanita has never used a substitute and the end client has stated that they would probably not accept a substitute as Juanita’s services are so specialised.
Juanita has a room set aside at home for her office and she spends 1-2 hours working on the projects from home per week. Juanita works as part of a team and she sometime mentors employees.
J Ltd has to make good any mistakes at its own expense. J Ltd has an ISO certificate and PII cover. It has invested in training and pays for professional advice and accounting.
The end client would have to give notice to end the engagement.
Conclusion
It is unclear whether IR35 would apply to this contract and more information would be sought by HMRC.
Using the business entity tests J Ltd is medium risk. IR35 risk assessment Juanita
Case Study 3 – Barbara
Barbara is a sole director, shareholder and worker of B Ltd, she specifically set-up B Ltd to win the contract.
Barbara contracts with an agency, which in turn contracts with the end client.
B Ltd charges by the hour and invoices monthly.
Barbara is not highly specialised so it is likely that someone else could do the work.
The client has not engaged Barbara for a specific task and can move her around. Barbara works as part of a team and a manager at the end client manages Barbara’s contract and sets Barbara’s work. Office hours are 9am to 5.30pm and the end client expects Barbara to work from their offices, Barbara has to ask for leave and she is provided with a laptop.
Conclusion
IR35 would apply to this contract
Using the business entity tests B Ltd is high risk. IR35 risk assessment Barbara
IR35 is a tricky part of the legislation, if you would like a contract reviewed please contact me via the contact form below or by telephone for a consultation.
HMRC are withdrawing their business entity tests from April 2015