IR35 – stricter in 2012, what’s important to know…

Here at QAccounting we are always keen to keep you up to date with all legislation that affects Self Employed individuals. If you haven’t already, please feel free to read our general overview of what IR35 is, and watch our videos on this topic here.

Thanks to Qdos Consulting – IR35 experts for their help in this blogpost. This blogpost is to update you on the most recent developments in IR35 as at June 2012.

So, what’s new in IR35 Legislation?

Changes to IR35 Legislation have been underway since July 2010 when the office of ‘Tax Simplification’ came into play. Made up of Treasury officials and Tax experts, they were soon tasked with investigating IR35 as a whole and making a decision on whether the IR35 guidelines should be abolished – very important for Contractors and Freelancers like you.

Soon the Office of Tax Simplification released their report which recommended that IR35 should either be, in general terms:

  • a) Suspended and then abolished, or
  • b) Be retained and that the government improve the administration of it

So, we all waited with baited breath as to what decision would be made on this by the government, and when the 2011 Budget came about, they confirmed that they had decided to keep IR35, with the assurance that they would improve the administration of it.

Business Entity Tests

In an attempt to keep all contractors and freelancers clear on what keeps them compliant within the IR35 administration, the government introduced the 12 Business Entity Tests in May 2012.
This offers a points system so you can confirm whether your work comes under the category of High Risk, Medium Risk and Low risk.

It’s worth noting that this test will never actually be submitted to HMRC, it’s more of a self checker – to keep you right.

Here’s an overview of the 12 tests:

Test 1

Business Premises Test. Does your business own or rent business premises which are separate from your home and the end client’s premises? (+ 10 points for answering yes = a high one). There are lots of co-working spaces and services offices you can utilise for some of your working week throughout the UK.

Test 2

Do you need Professional Indemnity Insurance? (yes, + 2 points). QAccounting has a great relationship with business insurance provider Qdos who provide QAccounting client’s with improved reduced rates on your insurance. If you do not already have a policy in place, or are simply looking for a comparison quote, please enquire with your dedicated Account Manager.

Test 3

The Efficiency Test. Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently? i.e. finish a fixed-price contract early. (+ 10 points for a yes = a high one)

Test 4

The Assistance Test – Does your business engage any workers who bring at least 25% of your yearly turnover? (yes here earns you a staggering 35 Points)

Test 5

The Advertising Test. Has your business spent over £1,200 on advertising in the last 12 months? (a small one with yes only earning 2 points)

Test 6

Previous PAYE test. This embodies the whole point of IR35 with you not being a ‘disguised employee’, and asks the following about your end client:

  • have they tried to engage with you on PAYE employment terms (i.e as a ‘perm’)
  • have they done this in the last 12 months?
  • and have they proposed this with no changes to your working arrangements?

(Answer yes to the above and you will lose 15 valuable points)

Test 7

The Business Plan Test – Does your business have a business plan with a cash flow forecast which you update regularly? And does your business have a business Bank account, separate from your Personal Account? (you will earn 1 point if you answer yes to both)

At QAccounting, when we set you up as a Limited Company, we would arrange a business bank account meeting for you or ensure that you have one set up. If you have answered No regarding the Business Plan, we can help you rectify this as soon as possible and provide you with a sample/template business plan, which has been designed by Business Gateway.

Test 8

The Repair at Own Expense Test – Would you have to bear the cost of having to put right any mistakes? (if yes – you earn 4 points)

Test 9

The Client Risk Test- Has your business been unable to recover payment for work done in the last 24 months, for a value of more than 10% of yearly turnover? (A yes will clearly disadvantage you as a business trying to generate profit, but it will earn you 10 points on this test)

Test 10

The Billing Test. Do you invoice for work carried out before being paid and negotiate payment terms? (if you do, you’ll earn 2 points)

Test 11

The Right of Substitution Test. Does your business have the right to send a substitute. (contract based question) (yes earns 2 points)

Test 12

The Actual Substitution Test (working practices test) (earns you a staggering 20 points!). We’ll touch on working practices further on, but this basically means you actually act out your contractual right to get a substitute in to cover your work for you.

So what does it all mean to you?

  • Less than 10 points – you are a high risk of being IR35 Non compliant.
  • 10-20 points – you are a medium risk.
  • If over 20 points – you are a low risk.

We hope the above helps you figure out how compliant you are being, and how some small changes could make all the difference to your points score.

‘But I have hardly heard of anyone being investigated for IR35?’

True, at QAccounting, since 1999 and with over 3,000 clients whom we have helped become self employed, we have only had 3 of our client’s investigated under IR35, and all three were proven to be compliant. We are proud of that fact. However, IR35 tests are about to take a much stricter stance, much like the early days when investigations were common.

Investigations back in April 2006 to April 2007 made revenue of £1,906,619 in claimed back taxes of self employed individuals who were found to be operating in a non compliant IR35 manner.
HMRC will be making this clear when they start a series of high profile cases which you will be sure to see in the papers, but it’s important that you are aware that no one is exempt from this.

HMRC have now created 3 teams with 12 officers dedicated to HMRC IR35 Investigations which gives them the potential for 2,000 IR35 enquiries in a year – they are seriously upping the ante.

Written by Michelle Barclay, Business Manager at QAccounting with help from Qdos Consulting. If you want to learn more about IR35, please get in touch.

More Posts

Basis Period Reform

The article helps self-employed sole traders and partnerships to understand how basis period reform will impact their business in the 2023/24 transitional tax year, and what steps need to be taken to ensure they do not lose any brought forward tax reliefs and remain compliant!

George Ian Hope

Tax Payment Dates and Estimating the Values of Tax Payable

The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.

George Ian Hope

Corporation Tax Rate Changes

In the March 2021 Budget Rishi Sunak proposed a number of changes to the way that Corporation Tax will be calculated and applied and these changes will come into effect from 1st April 2023.

George Ian Hope