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What Is IR35?

What are the IR35 tests?

We have provided below the three main IR35 tests to determine if you are a “disguised employee” and therefore within IR35.

It is important to remember when reading our tips on passing the tests below, that you need to not only have a well written and professionally reviewed contract but also consider your actual work practices.

IR35 Tests

Test
What is it?
How to pass it
Personal service and substitutionA truly independent contractor would be providing a service to his client, and therefore should not matter if he does the work himself or uses a substitute.

Whereas an employee must do the work himself and could never use a substitute.
You should have a “substitution” clause written into your contract showing that you can use subcontractors to complete the service for the client.

If you can substitute yourself with a suitably qualified person to provide the service, you are not an employee.
Mutuality of obligationAn independent contractor would not expect to always have a continuous supply of work, but would rather be contracted to supply services towards a specific project or set of tasks.

Whereas an employee is expected to turn up for work regardless if the work has run out.
You should have a “termination” clause in your contract allowing you to you end the contract early if required.

If you can end the contract quickly and easy and there is no expectation of the client offering you a continuous supply of work and contracts, you are not an employee.
Direction & ControlAn independent contract would have a degree of freedom over how they carry out their work and their working practices.

Whereas an employee is obliged to normally work from a specified place and carry out tasks to specific instruction.
Your contract should be clear that you are in control of your locations and hours of work. If you client is heavily involved in your day to day activates, this is deemed as employment and you would fail the test.

In our experience you should be using your expert skills to develop and propose solutions to client issues and problems.

Note, this does not mean that a client cannot monitor and check your work – you simply must not be tied down to the client.

What are the HMRC business tests?

Although IR35 has been around for many years now, HMRC have recently setup “IR35 Task Forces”. These are specialist teams of tax inspectors with more resources to throw at investigations. They have also come up with these much publicised “business entity tests”.

Please note that the IR35 business entity tests below do not have any bearing in a case against you as they are not part of the legislation – so you should ensure that you give much more importance to the above IR35 three tests as this is what many contractors have successfully used to beat HMRC in investigations. Nevertheless, we shall explain the business entity tests below.

How the business entity tests work

Essentially HMRC use these to calculate the risk in their opinion that you are inside IR35 – so they would be used to do an initial risk analysis before doing a full investigation.

Each test has a series of points and depending on your score you will be identified as either low, medium or high risk.

Naturally, the higher the risk, the more chance that HMRC will check if IR35 applies to you.

The tests focus on the following area:

  • Business premises – do you have your own office space?
  • Insurance – do you have professional indemnity insurance to cover your work against any claims?
  • Efficiency – have you had efficiency improvements that have meant more revenue and profit?
  • Assistance – do you have any workers bringing in 25% or more turnover?
  • Advertising – have you spent more than £1,200 on advertising in a year?
  • Previous PAYE – have you previously been an employee of the client?
  • Business plan – do you regularly make business plans?
  • Repair at own expense – do you have to rectify any mistakes in your work?
  • Client risk – have you had any significant bad debts?
  • Billing – do you always bill before getting paid?
  • Right of Substitution – do you have a right to use a substitute to carry out the work?
  • Actual Substitution – have you actually had employees?

We stress again these business entity tests are not as important as the main IR35 tests. You can prove you are outside IR35 by making sure your actual working practices are in line with the IR35 tests.

Next: “What else can I do to improve my IR35 status?”
Any questions? Speak to one of our friendly accountants on 020 7969 2879.