Intermediaries Legislation (IR35) Business entity tests

Intermediaries Legislation (IR35)
Business entity tests
Example scenarios May 2012
HMRC have released guidance laying out their risk-based approach to checking compliance with IR35. It lays out the approach to compliance and how to work out which ‘risk band’ a business may be in. It also gives example scenarios to illustrate when and why IR35 will apply to an engagement. Interestingly, it is aimed at the businesses rather than at agents.
What are risk bands?
HMRC state:
‘If you are in either the ‘high risk’ band or the ‘medium risk’ band, there is a risk that we will check whether IR35 applies to you. And this risk is not low.
So you need to decide whether IR35 applies to any of your engagements – especially if you are in the ‘high risk’ band.
If you have taken the ‘business entity’ tests, and you are in the ‘low risk’ band, you need to keep evidence to support your answers.
If we check whether IR35 applies to you, please show us your evidence that you are in the ‘low risk’ band.
If your evidence proves to our satisfaction that IR35 does not apply to you or that you are in the ‘low risk’ band, we will close our IR35 review. And we will undertake not to check again whether IR35 applies to you for the next three years, provided that:
 the information you have given us is accurate
 your circumstances – and, in particular, your working arrangements – do not change in that time.
The business entity tests look at how your business works overall. But, for the purposes of calculating PAYE and NIC under IR35, you need to consider each engagement separately.’
The business entity tests
HMRC have drawn up the business entity tests to help businesses find out which risk band they are in. The tests are completely voluntary and there are twelve of them:
Business premises (10 points) – Does your business own or rent business premises which are separate both from your home and from the end client’s premises?
PII (2 points) – Do you need professional indemnity insurance?

Efficiency (10 points) – Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently?
Assistance (35 points) – Does your business engage any workers who bring in at least 25% of your yearly turnover?
Advertising (2 points) – Has your business spent over £1,200 on advertising in the last 12 months?
Previous PAYE (-15 points) – 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?
Business plan (1 point if the answer to both is yes) – 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?
Repair at own expense (10 points) – Would your business have to bear the cost of having to put right any mistakes?
Client risk (10 points) – Has your business been unable to recover payment for work done in the last 24 months, more than 10% of yearly turnover?
Billing (2 points) – Do you invoice for work carried out before being paid and negotiate payment terms?
Right of substitution (2 points) – Does your business have the right to send a substitute?
Actual substitution (20 points) – Have you hired anyone in the last 24 months to do the work you have taken on?
Each test asks at least one question and a yes answer scores points. A score of less than 10 = high risk, 10 to 20 medium risk and more than 20 low risk. Each test lays out evidence to be kept to substantiate the test score.
‘If you find that you are in the ‘low risk’ band, you need to gather and retain enough relevant and reliable evidence about your business as a whole to prove to our satisfaction that you are in the ‘low risk’ band.’
Disclaimer – for information of users
This summary is only an overview of selected regulation and guidance issued at the date of publication. No action should be taken without consulting the relevant legislation, guidance or where necessary, seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the company.