The tax office have recently stated that they are seeking to increase their enquiries into IR35. This is a piece of legislation well known to self employed contractors operating through one-man limited companies, and attempts to identify disguised employment and tax a business accordingly. As part of this new initiative, they have published a twelve point test to determine your risk of being enquired into. The test is to identify targets for investigation and not to determine liability under IR35. However, the implications are clear. The tests to be applied and their related scores, are as follows:
- Business premises test – Do you own or rent separate business premises? (10 points if yes)
- PII test – Do you need professional indemnity insurance? (2 points if yes)
- Efficiency test – In the past two years have you had an opportunity to increase profits with efficiency savings? (10 points if yes)
- Assistance test – Do you employ any workers bringing in at least 25% of the yearly turnover? (35 points if yes)
- Advertising test – Have you spent over £1,200 on advertising in the past year, excluding entertainment (2 points if yes)
- Previous PAYE test – Have you been employed by the same client in the past year under similar working arrangements (Minus 15 points if yes)
- Business plan test – Have you a business plan with a regularly updated cash flow forecast, and a business bank account separate from your personal account? (1 point if yes to both)
- Repair at own expense test – Would you have to bear the cost of rectifying any mistakes? (4 points if yes)
- Client risk test – During the past two years, have you had bad debts of more than 10% of yearly turnover? (10 points if yes)
- Billing test – Do you invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
- Right of substitution test – Does the business have the right to send a substitute? (2 points if yes)
- Actual substitution test – Has the business hired anyone in the previous two years to do the work it has taken on? (20 points if yes)
After answering the above questions, if you score 10 or below then the tax office say that you are at a high risk of being investigated. If you score 20 or above then you are a low risk.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in these and other matters, including providing a very cost-effective payroll bureau service. We also offer a very cost effective insurance against the cost of protecting yourself against these tax office fishing trips. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.