Category Archives for "IR35"

IR35 Business Entity Test for Contractors – questions and processes.

As of April 2015 the business entity tests are no longer being used. HMRC has, however, given a commitment not to investigate any contractor who took the test and got a low-risk score, for three years.

One way of checking your IR35 status as a contractor is to take HMRC’s online business entity test. This assesses both your IR35 risk and your chances of being investigated. Brought in in 2012, the test is based on twelve questions online which contractors working through limited companies can work through. Each of these twelve questions has a set weighting and depending how they answer the questions and the score they receive, contractors will be able to see what level of risk they are. The risk categories are divided into low, medium and high.

 HMRC has designed the test with the aim of screening limited company contractors and being able to then focus most of its attention onto the high-risk band contractors. They are the ones most likely to have compliance issues and be within IR35 so it makes sense for HMRC to check them first. Lower risk contractors who can provide proof to back up their low scores on the test will be less likely to have to go through any kind of HMRC status enquiry and will not need to be investigated for another 3 years.

On the other hand, anyone in the medium or high-risk categories is likely to feel the full force of an IR35 status enquiry. As any contractor knows, this can lead to having to pay back taxes and NIC’s, interest and penalty payments as well as losing expenses. 

How It Works – The IR35 Business Entity Test Process

The business entity test process begins with HMRC asking the contractor if they have thought about IR35 and if they consider themselves to be outside of the IR35 legislation. If so, they go on, can the contractor provide evidence to support their responses. At that point, any contractors who are able to provide that evidence and prove that they aren’t in false employment – and can show they are part of a genuine independent contracting business – will have their IR35 status enquiry halted straight away and will not be required to do it again for at least 3 years.

Once completed, a business entity score is something a contractor can use to help demonstrate that they are definitely ‘in business’. Nevertheless, it is still important for contractors to make sure they keep using best IR35 practice at all times.

How It Works – The IR35 Business Entity Questions

For your reference we have listed the twelve questions (and their weighting) which make up the HMRC business entity test:

  1. Does your business rent or own business premises which are separate both from your home and from the end client’s premises? (Yes = 10 points)
  2. Do you as a contractor need Professional Indemnity Insurance? (Yes = 2 points)
  3. Efficiency – Have you, as a contractor, in the past 2 years, received full payment for any work which you completed ahead of schedule? (Yes = 10 points).
  4. Assistance – Does your contracting business use any other workers – who contribute 25% or more towards your turnover? (Yes = 35 points).
  5. Advertising – Have you spent in excess of £1,200 on advertising in the past year? (Yes = 2 points).
  6. Previous PAYE – Have you been previously employed by your current client, on a PAYE basis? (Yes = take off 15 points).
  7. Business Plan – Does your contracting business have a business plan, and does it have a business bank account? (Yes = 1 point).
  8. Repair at Own Expense – Would your business be required to pay to fix any mistakes you have made at work? (Yes = 4 points).
  9. Client Risk – Have you been unable to recover any payments for a client at any time in the past 24 months that were worth at least 10% of your business’ annual turnover? (Yes = 10 points).
  10. Billing – Do you invoice clients before being paid, and do you negotiate your own payment terms? (Yes = 2 points).
  11. Substitution – Are you allowed to provide a substitute if you are unable to perform your contract duties? (Yes = 2 points).
  12. Actual Substitution – Have you actually had to use a substitute over the past two years, and have you been responsible for supervising and paying the substitute? (Yes = 20 points).

High Risk = 0 – 10 points

Medium Risk = 11 – 20 points

Low Risk = 21 points and above. 

With the score ranges above, it is clear that a high number of contractors will find themselves in the high and medium risk bands, despite their best intentions. 

Remember, It’s Not Just About The Business Entity Test!

However, contractors should always remember that these business entity tests are simply a kind of screening process and are there to help the Treasury focus its compliance investigations in a better way. The legislation behind the tests is still the same as it always was. If a contractor was to find themselves being investigated all that would matter would be whether they were within the accepted limits of that legislation and that the case law on IR35 was on their side. Everything else, including the business entity test, would be irrelevant.

Supposedly the business entity test and the IR35 forum were there to provide a better-administered version of IR35 but in reality, the risk scenarios and business entity test brought in by HMRC merely added, even more, confusion for contractors trying to make sense of it all. Thanks to the business entity test, more and more contractors will have to take part in unnecessary, expensive and probably stressful IR35 enquiries.

How to be IR35 Compliant

Worried about IR35? You’re not alone. Ask any contractor (especially those working via limited companies) what their biggest work stress is, or what they like least about contracting, and you will invariably get the same answer – IR35.

Ever since it was introduced in 2000 by HMRC, IR35 has got stricter and stricter in its pursuit of ‘disguised employees’ to the point where it is now necessary to check and double check every contract for IR35 potential and to conduct yearly IR35 tests on your contracting business to make sure you don’t get trapped. With that in mind, this article offers a brief checklist of issues to bear in mind for contractors who are concerned about their IR35 compliance.

Make Sure You Work For Multiple Clients

One of the easiest protective measures to put in place, and the most obvious, is to diversify your contracting client base. Make sure that you never spend too much time on one client (particularly if you would be working on their premises.) By moving regularly around various clients you ensure you won’t be logging in too many hours/days/weeks with one client, at one location, and giving the impression of being a ‘disguised employee.’

Make Sure You’ve Got Your Own Kit

If you want to look like your business is yours and that you’ve invested in it then it is essential to be able to show that you have spent your own money investing in your own equipment for your own business. Whatever equipment you need for your work, make sure it is your own. The moment you start letting clients buy you equipment or provide you with equipment to work a contract is the moment you open yourself up to falling within IR35.

Put Your Money Where Your Mouth Is

In other words, carry some financial risk! Invest money in your limited company, spend money getting your business started, and take on risk in your working life. This doesn’t mean go gambling at lunchtime with the company funds, just that you work on the basis that if you don’t deliver, or you screw up, you’re prepared to issue refunds or not get paid. If you work and are not guaranteed to be paid then that is an element of risk as you are reliant on your various clients paying you. That is a risk and is a positive thing to show HMRC to stay clear of IR35.

Invoice Wisely

Don’t just issue invoices based on an hourly rate for the work you are doing. You will need to track your time for your own books and those of your clients and you may even want to use timesheets. But you shouldn’t just invoice on your hourly rate. Instead, you should charge on the cost of your hourly rate plus your business expenses. Any business will have operating expenses that it has to find and these should be built into your costs – billing for this ‘bench time’ is expected as it is part of the working hours you spend on your business, but which can’t be specifically attributed to one client. In order to cover all of your bench time costs, it is absolutely necessary to retain a bit of profit from each job towards non-billable hours. And doing so will show HMRC that you are running a business, not just being employed by a client.

Keep Perfect Records

Data retention is your best friend in the battle against IR35. The more information and data you have available showing both your revenue from different clients and your operating expenses (with as much detail as possible) the better case you will be able to build that you are not a disguised employee, rather that you are a business entity.

Register for VAT

Though this is only compulsory for those contractors who earn more than £83,000, any contractor who starts to get near this figure or who expects to be there soon should probably register anyway. Not only will it encourage much better record taking but also it will look more professional and make you look more like an independent business.

Register With The Information Commissioners Office (ICO.)

Similarly, joining up to the ICO for data protection purposes will also look professional and independent.
Spend Money on Advertising – This one comes with dual benefits. Firstly it will get you more clients and keep your name out there. Secondly, it helps you with your IR35 issues. HMRC need proof that you aren’t just working as a disguised employee for one client. If you were not advertising, they would question how clients can find you? So retain records of all the money you spend on advertising your services (as well as the adverts themselves), and keep hold of any receipts for business networking events and meet n greets, business cards, flyers and contracting or industry memberships. Absolutely anything that shows you constantly trying to attract new clients will be useful in arguing your non-IR35 status.

Be Easily Reachable to New Clients

As with advertising, another way to draw a clear line between you and your clients is to have obvious ways of reaching and signposting your business. These should include a business address and an office space to work in and a business website with a business email address.

Learn The Mantra – Supervision, Direction and Control!

HMRC looks for any sign that you are under either the supervision, direction or control of a client. If so, you will be within IR35. There are a number of things you can do to avoid this, and it is worth incorporating them into your thinking when signing new contracts.

Substitution

Make sure you have a substitution clause in your contract. This provides a clear marker that your business is taking on a contract (and that someone else will fulfil the contract if you get sick) and not you as a person.

Keep IR35 In Mind At All Times

As well as the mantra of supervision, direction and control, always keep in mind how something will look if you are ever called in for an IR35 investigation. Getting your mindset right is half the battle. Firstly, as you go about your working life, make sure everything you do is as a business, not something that feels like being an employee of one client. How does something look? How could it be perceived? Keep this in mind at all times. Secondly, if the worst case does happen and you are investigated then make sure you go into the investigation

  • (a) armed with proof of everything discussed above
  • (b) with the mentality of a business owner who works for no one but himself!

IR35 Supervision, Direction and Control Explained

One of the essential factors that HMRC uses to sniff out false employment via IR35 is the concept of ‘Supervision, Direction and Control.’ This is a concept that has undergone a few changes over the years but the basics are still relevant to every working contractor who has a healthy fear of being caught by IR35. In this article we will look at ‘SDC’ in full, in order to help you navigate all that it entails in your working life.

Understanding ‘Supervision, Direction and Control.

The first thing to do is make sure you fully understand the importance of SDC. Contractors these days all understand why control is such an important factor in staying outside of IR35 and SDC is a crucial part of that concept of control. There are four fundamentals that make up HMRC’s control test and they are

  1. (1) What work is being carried out?
  2. (2) When is it being carried out?
  3. (3) Where is it being carried out?
  4. (4) How is it being done?

When it comes to the concepts of ‘supervision direction and control’ it is number 4 that is relevant – are you, as a contractor, being supervised, directed or controlled in how you go about your work for the client? And how do you answer that question? Luckily, HMRC has provided some guidance on this one:

HMRC Guidance on Supervision

As a contractor, you will be deemed to be subject to some kind of supervision if your work involves another person ‘overseeing’ you as you work. This is considered supervision because the person overseeing you is essentially ensuring that you are doing the work you are supposed to be doing and checking that you do it in the correct way. Additionally, if the person overseeing you is deemed to be helping you so that you can improve your skills and depth of knowledge, this training would count as supervision too.

HMRC Guidance on Direction

As a contractor, you will be deemed to be subject to some kind of direction if there is someone from your client company making you do your contracting work in a certain way. A director would be someone who gives you advice, guidelines or instructions as to how to do the work. They might also coordinate with you as to how the work is done while you are doing it.

HMRC Guidance on Control

As a contractor, you will be therefore deemed to be subject to control if someone is telling you what work you are to be doing and how you are to then go about doing it. Additionally, they would be deemed to be controlling you if they also had the power to transfer you from the job you are doing to another, different job.

For more HMRC guidance visit: 

https://www.gov.uk/government/publications/employment-intermediaries-personal-services-and-supervision-direction-or-control/employment-intermediaries-personal-services-and-supervision-direction-or-control

HMRC Muddies The Water Even Further

If it was just those three definitions then it would be relatively simple but HMRC decided to make the test even more difficult to pass. Firstly, they made clear that any person is able to subject you to supervision, guidance and control, not just the end user for you to end up failing the test. Secondly, they also made clear that anyone can just have the ‘right of’ SDC over you in order for you to fail that test (it needn’t be exercised, just present.) Lastly, only one of the three needs to be present in order for you to fail. Just being supervised, or just being directed would qualify you to fail.

This obviously makes things much harder and has been the cause of much annoyance in the contracting community, particularly when HMRC has been quoted as saying more generally that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.”
Nevertheless, there is some reason to be cheerful. In Staples v Secretary of State for Social Services it was ruled that simply giving a brief to a contract worker was not enough grounds for the provider of the brief to be considered as exerting SDC over that contract worker. Additionally, there are of course steps you can take to prevent supervision direction and control.

Steps That Can Be Taken To Prevent Supervision Direction and Control:

Contractual Steps

If you have never been subject to SDC during your actual contract work then the only place you have to be worried about is the contract itself. Thus the contract becomes more important when it comes to the terms that address the right of control and it is essential that there are no clauses that show any exertion of control. If the contractor handles this himself that’s fine but if it is through an agency the contractor may not see the upper levels of the chain. If that is the case it is essential that the contractor asks the agency to put in a clause in the lower level contract which states clearly that all contractual provisions will be mirrored in the upper contract. If not, the contractor is then entitled to sue.

Empirical Steps

After this contractual step has been taken the contractor then needs to put in place a ‘Supervision Direction and Control’ specific Confirmation of Arrangements document. This will be a strategic document that helps to verify the lack of SDC. It does this by making clear that the common features of SDC are not and will not be present in this working arrangement and confirms this by getting the end client, agency and contractor to all sign it.
Additionally, it is worth keeping hold of emails between yourself as contractor and the end client in which you discuss any services requested of you by the client that are not defined in the contract and which have to be done quickly without a chance to clearly define them in another contract. Your input on these emails will be essential in order to show that you cannot be simply moved around jobs at the whim of your client. You should also keep any documents in which the end-client’s requirements are outlined and you have responded with your own requirements and suggestions. Get into the habit of doing this for all of your contracts.

Precautionary Steps – IR35 Insurance.

One thing to bear in mind is that it is possible these days to actually purchase IR35 insurance. Start by checking your current business insurance but it is unlikely that this will cover you. However, if you are concerned about getting caught up in IR35 it is worth looking into one of the many policies out there which will cover your current and future contracts (and sometimes will even cover your past ones too) against the costs of any investigations and demands for tax.

Research The Case Law

Lastly, if you need more information and reference points it doesn’t hurt to read up a bit on the past case law for IR35 infringements. There are a number of prominent cases that have already been before the courts which illustrate that contractors are not always controlled via SDC in the way that HMRC likes to paint them as being.

For example, in ‘Morren v Swinton & Pendlebury Council’, the judge was swayed by the argument that when assessing a highly skilled professional contractor, supervision and control was not really a suitable method for that assessment. And in ‘Marlen Ltd’ a contractor at JCB known as Mr Hughes had been briefed as to what was to be built by a project manager. The engineering manager at JCB said that as a contractor he would be under the control of a number of project leaders. Actually, in reality all that really happened was that they oversaw the project and occasionally checked on the project’s progress. He had to report to senior designers on a daily basis and took occasional instructions but that was all and he was only a small part of a much bigger project, hence the need for this contact. The court accepted that such direction was reasonable in order to make the project run smoothly and this was not therefore a case of SDC and IR35. The court’s argument was essentially that the degree of control has to be judged in context with what is being worked on and produced. Lastly, in the case of ‘Primary Path Ltd’ it was again made clear that the issue of control is more difficult to adjudge when the person has been contracted for their highly specialist skills. When a contractor, Mr Winfield was brought into a team for his very specialist skills to help with one particular project, there was some supervision and direction for that project but when it came to the management of the project as a whole he was given free rein to work how he wanted. The court ruled that the level of control exercised did not go beyond anything you would expect from engaging an independent contractor.