IR35 business entity
Are the latest proposals for the weightings to be applied to the IR35 business entity a fair reflection of being truly in business on your own account? Can they be manipulated to give the answer you want without anything actually changing in the way you work?
Overall the business entity test weightings do appear to be unfair in terms of describing a PSC as being in ‘business on your own account’. Some of the questions simply would not be reasonably applicable to many contractors. For example, very few contractors would ordinarily need to own or rent their own business premises (worth 10 points if you do). Another example is the definition of Client Risk – ‘Have you been unable to recover payment amounting to more than 10% over the last two years?’ (worth 10 points if yes). This seems an odd and undesirable way to prove you are genuinely self-employed! Other questions attract what seem to be unreasonably few points, like the Billing test – ‘Does the business invoice for work carried out before being paid and negotiate payment terms?’ This could be a legitimate way for a genuinely self-employed individual to bill, but is worth only 2 points if yes.
The test has, understandably, come under severe criticism. The matter is still being hotly debated within the IR35 Forum as contractors have become alarmed that many will fall into the ‘high risk’ of IR35 investigation category despite being genuinely in business on their own account. However, a key point to remember is that this is essentially a self-assessment tool to alert you to possible areas of concern. It is not the IR35 test itself which takes into account a wider range of factors, the most important being the actual working conditions not just the wording of the contract. Ideally the wording should accurately describe your actual working practices while engaged with the client and it is these which ultimately prove compliance with IR35 or otherwise. For this reason, having each of your contracts professionally assessed for IR35 compliance can be crucial in reducing risk. If your contract is assessed as IR35 compliant and accurately describes how you go about your work for the client you are significantly lowering your risk of HMRC investigation under the current regulations.
The questions in the test are all factual ‘yes’ or ‘no’ answers so it’s not possible to manipulate them in any way. However, with IR35 complaint contracts in place and working practices which are genuinely self-employed in nature the results of this test will not fundamentally change anything and should not affect the way you usually work.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.