After months of consultations with industry experts, HMRC has issued detailed guidance to help freelancers with personal service companies to evaluate how likely it is they will be investigated for IR35 compliance.
In a 47-page document, they set out business entity tests to help you assess the risk of investigation, along with the level of evidence required for each test. There are also six detailed examples of freelance contracting scenarios, and explanations of how HMRC would assess these for IR35.
There have been no changes to the IR35 legislation. The new guidance is intended to help explain how HMRC decides who to investigate, and the information they are looking for to make a decision. However, HMRC has also created new specialist units around the UK to focus on IR35, and there is an expectation that the number of investigations will rise.
The business entity tests for IR35
At the heart of HMRC’s guidance are 12 tests which determine whether your company is at low, medium or high risk of investigation.
Each test has a point score associated with it and your overall risk is determined by your cumulative total. Score under 10 points and the risk is high; score over 20 and it’s low.
In summary, these tests are:
Premises - Does your company rent its own offices? 10 points if yes.
PII - Do you need professional indemnity insurance? 2 points if yes.
Efficiency - Could your business boost income through efficiency? 10 points if yes.
Assistance - Is at least 25% of the firm’s income through workers you engage? 35 points if yes.
Advertising - Have you spent over £1,200 in the last year (excluding entertainment)? 2 points if yes.
PAYE - Were you previously paid under PAYE by your client? Minus 15 points if yes.
Business plan - Do you have one, and a business bank account? 1 point if yes to both.
Repair - Do you have to pay to put right your mistakes? 4 points if yes.
Risk - Have you had to chase debtors or write-off unpaid bills? 10 points if yes.
Billing - Do you invoice before being paid and negotiate payment terms? 2 points if yes.
Substitute - Could your business send in someone other than you? 2 points if yes.
Actual substitute - In the last 2 years, have you hired someone to take your place? 20 points if yes.
Initial response to these tests has been negative, with many observing that most contractors using their own personal service companies would appear to be high risk.
The key points
- There are no changes to the IR35 rules. What HMRC has done is issue more guidance about the interpretation of the rules.
- HMRC has created new teams to focus on IR35, and the level of investigations will rise.
- It is important to assess each contract separately for IR35.
- A wide range of commentators has criticised the new guidance as being unhelpful, saying that HMRC has missed an opportunity to improve clarity and fairness around IR35.
If you’re a freelancer working through your own limited company, the new guidance from HMRC, combined with the news of a rise in investigations, should not give you sleepless nights. But it does appear to increase the chances of an investigation, with all the inconvenience and uncertainty that comes with it.
It is important to remember that every engagement you undertake should be separately assessed for whether it falls inside IR35.
If you have worries about the increased risk of an investigation, or would like to understand the potential financial impacts based on your personal situation, please get in touch.
As one of the first members of the Professional Contractors Group (PCG), Acconomy are committed to helping freelancers overcome the threats to their prosperity. If you have any questions, we would be happy to hear from you.
Acconomy Chartered Certified Accountants are specialists in IR35 for freelance contractors.
