IR35 can seem like a very complex and confusing topic for many people, but it is important to understand this piece of legislation in order to make sure you run your business legally.
This is where taking the HM Revenue and Custom’s IR35 business entity test can help with understanding the legislation and working out whether you contract is caught by IR35 or not.
What is an IR35 Business Entity Test?
In May 2012, HMRC created the business entity test in order to make the legislation easier for contractors to understand. It’s made up of a list of questions available online to help those who are self-employed to get an idea of what their IR35 status may be.
The twelve question tests are completely voluntary and are divided into sections:
• Business Premises
• Previous PAYE
• Business plan
• Repair at own expense
• Client risk
• Right of substitution.
Depending on how you answer the questions you will be rewarded points, which will then go on to determine how HMRC see your status.
The results are made up of three bands:
• More than 10 – Low Risk (there are no pointers in your contract that suggest IR35 may apply to you)
• 10 to 20 – Medium Risk (there are some pointers in your contract that suggests IR35 may apply for you, but some that do not)
• Less than 10 (there are several pointers that suggest IR35 may apply to you).
In or Out?
You must be honest answering the questions and be able to show that your working practices reflect your contract.
In order to fall outside IR35, you will need to show that you are working with the same level of responsibility, control and liability as other contractors. For example:
• Financial Risk – A contractor relies on their clients to pay them, so if there are any issues with this then you are essentially being put at financial risk.
• Control – Are you able to work under your own control or does the client manage you?
• Use of your own equipment – Although this can be a grey area as some companies insist you use their office equipment.
• Right of dismissal – If you have a set notice period then HMRC may see this as being similar to a permanent employees contract.
• Employee benefits – Contractor’s outside of IR35 should not be entitled to benefits such as holiday or sick pay, pensions or training courses.
If you fall inside IR35, then HM Revenue and Customs will view you as having the same benefits as a permanent employer, which means that you can’t claim certain expenses and will have to pay full tax and National Insurance contributions – basically, if you are classed as ‘outside’ you’ll end up taking home more of your earnings compared to inside IR35 take home pay.