IR35 Business Tests Not Working
An IR35 Forum was established as a result of an announcement in the 2011 Budget about the government’s commitment to improving the way IR35 was administered. The IR35 Forum looks at how the legislation works in practice and provides advice on improvements to the way it is administered. The forum includes representatives from organisations such as:
- ACCA (Association of Chartered Certified Accountants)
- ICAEW (The Institute of Chartered Accounting in England and Wales)
- CIOT (The Chartered Institute of Taxation)
- PCG (Professional Contractors Group)
- FCSA (The Freelancer and Contractor Services Association
- Federation of Small Business
At a meeting in May 2014, the IR35 forum came to the conclusion that the business tests used to determine whether a business fell under the IR35 legislation was not, in fact, working in the way it had been intended and businesses clearly outside the IR35 net were being flagged as within it.
These tests were originally drawn up by the IR35 forum members themselves in order to clearly define which businesses fell under the IR35 rules and were published in May 2012. According to HMRC the tests look at how a business works overall in order to gauge the risk that they will check whether IR35 applies. However, this latest conclusion by the forum could be an indication that the tests will be changed.
The underlying premise of the tests is to categorise a taxpayer as low, medium or high risk but, in practice, high risk tax payers are not necessarily within the IR35 legislation and low risk tax payers are not necessarily outside it because the tests are not detailed enough.
The IR35 tests include questions such as:
- Does your business own or rent business premises (not including a home office or space on a client’s premises)?
- Do you require professional indemnity insurance? (2 points)
- Does your business use any workers who contribute 25% or more of your annual turnover?
- Has your business spent more than £1,200 on advertising in the past year?
- Has a current client engaged to you on PAYE terms without changing the work you do for them?
- Do you invoice for work that you have already carried out?
The minutes of the May 2014 meeting have only just been published meaning that a further meeting was held in July 2014 before the May minutes were available. Another meeting is expected to discuss recommendations for the business tests so it remains to be seen whether the tests will, in fact, be changed to make the determination of whether a business falls within IR35 legislation, or not, easier to assess.