HMRC - IR35 update

[wemorgan]

HRRC have issued an update to their IR35 guidelines.

http://www.hmrc.gov.uk/ir35/guidance.pdf

There's a points test to give an approximation to your level of risk on being inside IR35.

Total score from the tests
Less than 10 - High risk
10 to 20 - Medium risk
More than 20 - Low risk

The Business Premises test – 10 points
The PII test – 2 points
The Efficiency test – 10 points
The Assistance test - 35 points
The Advertising test – 2 points
The Previous PAYE test – 15 points
The Business Plan test – 1 points
The Repair At Own Expense test – 4 points
The Client Risk test - 10 points
The Billing test – 2 points
The Right of Substitution test – 2 points
The Actual Substitution test – 20 points

 

[wemorgan]

Sorry about the formatting:

Test 1 Business Premises test Does your business own/rent separate business premises which are separate from your home and client’s premises? Yes = 10
Test 2 PII test Do you need professional indemnity insurance? Yes = 2
Test 3 Efficiency test Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently e.g. by finishing the work/project earlier than projected but still receiving the full agreed payment? Yes = 10

For example you originally agreed with the client/engager that the work would take 3 months and cost 10,000 but you finished in 2 months and still received the full 10,000 at the end of the 2 month period.
Test 4 Assistance test Does your business engage one or more workers who generate at least 25% of your business turnover annually? Yes = 35
Test 5 Previous PAYE test Have you been engaged on PAYE employment terms by your current client/end user within the last financial year with no significant changes to your working arrangements? Yes = (minus)*-15

If you are doing the same work you should answer yes to this question.**Current engager also includes working at a different location owned by your engager or working at a different company but which is connected e.g. part of the same group.
Test 6 Advertising test Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months? Yes = 2
Test 7 Business Plan test Does your business have a business plan with cash flow forecast, that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank? Yes = 1
Test 8 Repair At Own Expense test Would your business have to bear the cost of having to rectify any mistakes? Yes = 4
Test 9 Client Risk test Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover? Yes = 10
Test 10 Billing test Do you invoice for work carried out prior to being paid and negotiate payment terms? Yes = 2
Test 11 Personal Service test Does your business have the right to send a substitute? Yes = 2
Test 12 Substitution test Has your business hired anyone in the last 24 months to do the contracted work you have taken on? This could be demonstrated by sending a substitute in your place or by sub-contracting, but in both cases your business remains responsible for the work and for paying the substitute or sub-contractor. Yes = 20

You can still pass this test if you had to notify the end client of the name of the individual you are sent as a substitute.

 

[PXW]

So no test on number of customers?

 

[davidjpowell]

So no test on number of customers?

I noticed that as well - I did glance at their case study which seemed to take it into account.

 

[Chrishazle]

I would have scored about 3 - which makes me glad I retired long enough ago that they can't go back! In my day there seemed to be some difference depending on what tax office you dealt with - I dealt with one on the coast in the south east, but others in the same line of trade dealing with Aberdeen office had a far harder time!

 

[wemorgan]

HMRC's motives are clear to me:

IR35 is tax and National Insurance contributions (NIC) legislation which prevents people who use intermediaries from being better off than they would have been if their end clients had employed them directly. If you use an intermediary, but work for an end client on terms which would have made you an employee if the end client had engaged you directly, then IR35 will apply. If IR35 applies, it affects the amount of income tax under Pay As You Earn (PAYE) and NIC your intermediary will have to account for.

If the contract you are currently on, regardless of how long or how short, results in you working like an employee then you are likely to be inside of IR35.

To me that misses a fundamental aspect of being self employed - being mobile. How many experienced employees have worked for 3 companies over the last 5 years?

Surely a flexible work force is to be encouraged, especially in these economic times. If there's no financial reward where's the incentive to be flexible?

My personal experience tells me that contractors can pay more in taxation than equivalent employees, even without IR35. So IR35 could easily go towards discouraging flexibility - is that really what they are trying to acheive though these measures?

 

[markjay]

The general idea - as is the case with quite a few tax rules - is to prevent people from (ab)using IR35 as mean to avoiding tax, while allowing those that IR35 originally meant to cover to continue and benefit from it. But HMRC don't always get it right...

 

[wemorgan]

The income taken as dividends and therefore not taxed through PAYE/NI was still taxed as Corporation tax.

The only avoidance measures I was aware of was people paying themselves a salary less than the minimum wage

 

[markjay]

The income taken as dividends and therefore not taxed through PAYE/NI was still taxed as Corporation tax.

The only avoidance measures I was aware of was people paying themselves a salary less than the minimum wage

Going by the book, yes.

But when someone works for a large company and goes on the books as PAYE, tax is being collected at source and there is no room to manoeuvre (a plc is not likely to employ anyone for cash or for untaxed BIK).

However, when someone works as IR35 the tax burden is no longer with the plc - it's with the individual getting paid. And that's where there's a lot of room for creativity...

HMRC would really like everyone to be on PAYE - not just because of NI, but because it is a more efficient way for HMRC to collect income-related taxes. They want to ensure that when people are not PAYE, it's for a good reason.

 

[wemorgan]

HMRC would really like everyone to be on PAYE - not just because of NI, but because it is a more efficient way for HMRC to collect income-related taxes. They want to ensure that when people are not PAYE, it's for a good reason.

I agree. But then what's good for HMRC's convenience isn't always good for the economy as a whole. A mobile workforce IMHO benefits the economy. It's also quite possible, as it is in my case, for a one-man Ltd company to pay more total tax than if he was an employee. So simplistically it's a win-win situation as it currently stands. It's fair to allow financial reward for employment (lack of) risk, which is not fully measured in HMRC's latest points test.