Would You Fail the IR35 Business Test?

Although hardly hot off the press, the latest IR35 business tests continue to spur on much concern and debate amongst contractors and freelancers alike, some claiming that most contractors are failing the tests altogether.

This business entity test and its contents are plastered all over contracting websites across the web, and it isn’t hard to see why a bit of a crack has been made between the HM Revenue & Customs and business groups across the nation, as it is now coming to light that most contractors would potentially face the medium risk of an IR35 investigation at least.

The business entity test itself is not exactly absolute, with partakers being given 12 graded questions that differ in worth depending on their level of importance distinguished by the HMRC. Each question is given a score, then at the end of the test you score is totalled to them determine the potential risk of falling under IR35.

An example of the test is as follows:

  • Business premises test - Does the business own or rent business premises separately from the contractor’s home or end client’s premises? (10 points if yes)
  • Professional Indemnity Insurance test - Does the contractor need professional indemnity insurance (PI Insurance)? (2 points if yes)
  • Efficiency test - Has the business had the opportunity in the past two years to increase its revenue by working more efficiently? (10 points if yes)
  • Assistance test - Does the business employ any workers who bring in at least 25% of the yearly turnover? (35 points if yes)
  • Advertising test - Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising (2 points if yes)
  • Previous PAYE test - During the past year, has the end client engaged you with no major changes to your working arrangements (Minus 15 points if yes)
  • Business plan test - Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account? (1 point if yes to both parts of the question)
  • Repair at own expense test - Would the business have to bear the cost of rectifying any mistakes? (4 points if yes)
  • Client risk test - During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover? (10 points if yes)
  • Billing test - Does the business invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
  • Right of substitution test - Does the business have the right to send a substitute? (2 points if yes)
  • Actual substitution test - Has the business hired anyone in the previous two years to do the work it has taken on? (20 points if yes)

The scores used to assess contractors’ risk profiles are as follows:

Score Risk Level
Less than 10 points  High risk 
10-20 points Medium risk
More than 20 points Low risk

Now many contractors have failed this test, some only by a margin and others dramatically, but either way, falling under IR35 is bad news for any contractor. All freelancers or contractors are advised to contact a consultancy or IR35 specialist if they find themselves failing this test. Contractors should not be alone in their plight to overcome IR35 and must always ask for help even if they are just in need of direction, let alone when handling an inquiry.

By:Steven Bailey

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