New IR35 Tests

New IR35 Tests


Author: Niall Murphy

The intermediaries legislation, colloquially known as IR35, has been with us for about the last 12 years

Broadly, it seeks to target individuals who provide their services through an intermediary (usually a company or partnership) in order to avoid being classified as employees.

The benefit of such an arrangement for the individual, if successful, is that it reduces the tax payable by the individual, since they are able to extract profits from the intermediary in a more tax-efficient manner.

The purpose of IR35 is to treat the individual as if he were an employee and subject the income in the intermediary to tax and national insurance. In determining whether IR35 applies, the usual case law tests determine whether the individual is an employee or self-employed.

Whether or not IR35 applies has been the subject of a large number of tribunal cases, where the results of which are dependant on the facts presented at each tribunal.

Business Entity Tests

In an attempt to reduce the number of disputes over whether IR35 applies the Revenue has recently published its pilot business entity tests. The objective of these tests is to enable businesses to self-certify whether IR35 applies to them. It does not mean that the Revenue will accept the self-certification but is meant to give a greater degree of certainty to businesses.

The aim of the tests is to categorise business into three risk bands: low, medium, and high. If the Revenue is satisfied that a business is outside of IR35 or in the low risk band, then it will take no further action. If a business falls into the medium or high risk band then the Revenue will look at the business in more detail to see if IR35 applies.

There are twelve separate tests. These are as follows:

  • do you have business premises
  • do you need PI insurance
  • can you increase income by working more efficiently
  • have you spent more than £1,200 in advertising
  • have you been employed on PAYE
  • has your current client previously subjected your earnings to PAYE
  • do you have a business plan and a business bank account
  • do you have to put mistakes right at your own expense
  • have you suffered bad debts
  • do you invoice for work carried out
  • do you have the right to send a substitute to carry out the work
  • have you hired anyone in the last 24 months to carry out work that you have taken on

Different scores are allocated to each test and depending on the cumulative score a business is then allocated to a particular risk band.

Does this help matters?

The reaction to the tests has, on the whole, been hostile. Generally, they are seen as adding an additional layer of complexity to what is already a grey area.

Arguably, they do not deal with some of the most important points in determining whether IR35 applies. For example, the right for business to send a substitute is only allocated two points. However, in many cases this has been held to be a decisive factor in favour of the taxpayer.

It therefore seems unlikely that the introduction of this pilot is going to resolve the contentious issues around IR35.