It is important for contractors to understand the risk and impact of the IR35 legislation, and it is equally important for companies that use contractors because these companies will be expected to tax the contractors accordingly and make PAYE/NIC payments to HMRC.

The guidance does not provide definitive answers as these can only be provided by assessing the specific contracts against case law. However, it does provide 12 business entity tests that can be used to calculate a risk for each contracting company/individual on each specific contract.

HMRC will use three risk bands:

• Low
• Medium
• High

These risks dictate the likelihood of an IR35 review. If you have evidence to prove you are low risk, HMRC would close any review.

To decide on the level of risk, contractors can calculate a score based on a points system for each of the 12 business entity tests. In summary, the tests are as follows:

1. Does your business own or rent business premises which are separate both from your home and from the end client’s premises? [Score 10 points if your answer is Yes]
2. Do you need professional indemnity insurance? [Score 2 points if your answer is Yes]
3. Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently? [Score 10 points if your answer is Yes]
4. Does your business engage any workers who bring in at least 25% of your yearly turnover? [Score 35 points if your answer is Yes]
5. Has your business spent over £1,200 on advertising in the last 12 months? [Score 2 points if your answer is Yes]
6. Has the current end client engaged you on PAYE employment terms within the 12 months which ended on the last 31 March with no major changes to your working arrangements? [Score minus 15 points if your answer is Yes]
7. Does your business have a business plan with a cash flow forecast which you update regularly? Does your business have a business bank account, identified as such by the bank, which is separate from your personal account? [Score 1 point if your answer is Yes to both questions]
8. Would your business have to bear the cost of having to put right any mistakes? [Score 4 points if your answer is Yes]
9. Has your business been unable to recover payment for work done in the last 24 months worth more than 10% of yearly turnover? [Score 10 points if your answer is Yes]
10. Do you invoice for work carried out before being paid and negotiate payment terms? [Score 2 points if your answer is Yes]
11. Does your business have the right to send a substitute? [Score 2 points if your answer is Yes]
12. Have you hired anyone in the last 24 months to do the work you have taken on? [Score 20 points if your answer is Yes]

The risk is assessed based on scores as follows:

• Low – more than 20
• Medium – 10 to 20
• High – less than 10

To assist in investigations, HMRC is forming specialist IR35 teams in Salford, Edinburgh and Croydon to pilot the new approach.

The full guidance can be accessed here – http://www.hmrc.gov.uk/ir35/guidance.pdf.

If you have any queries, please contact us on 0845 177 5007 or by e-mail at admin@mjfaccountancy.co.uk.