HM Revenue & Customs is expected to publish further guidance on when and how IR35 rules will apply during publication of next week’s Budget. It is anticipated that the new approach will lead to more restrictions on contractors and increased IR35 tax investigations.
IR35 is a long standing anti-avoidance measure. Many workers, including senior civil servants, have avoided classification as employees, with the resultant increase in tax liabilities, by routing their contract through their own limited companies. IR35 attempted to stop this, but was generally considered to be ineffective. The anticipated amendments are designed to make the IR35 provisions more effective by ensuring that more people are caught.
The tax office has previously produced an IR35 checklist, published on the HMRC’s website, designed to grade a contractor’s chances of being investigated. Each item on the checklist carries a point score, and the more points the contractor amasses, the less likely HMRC will be to investigate them. The checklist includes the following items:
• Business premises test – Does the business own or rent business premises separately from the contractor’s home or end client’s premises? (10 points if yes)
• PII test – Does the contractor need professional indemnity insurance? (2 points if yes)
• Efficiency test – Has the business had the opportunity in the past two years to increase its revenue by working more efficiently? (10 points if yes)
• Assistance test – Does the business employ any workers who bring in at least 25% of the yearly turnover? (35 points if yes)
HMRC has worked with the IR35 Forum to clarify the existing IR35 rules and published new guidance in May 2012. This included six scenarios, developed jointly with the IR35 Forum, detailing when and why IR35 applies.
“We also produced the business entity test giving people a points score, the higher the points score the less likely someone is likely to have an IR35 enquiry. For those who want absolute certainty HMRC provides a free, confidential contract review service,” she said.