Over the years contractors have often set up limited companies to reduce the amount of tax they pay. Recent publicity about civil servants and BBC personnel has brought the focus back on to the rules which determine whether personal service companies, limited companies or partnerships provide protection from the IR35 rules intended to prevent the avoidance of tax and National Insurance Contributions (NICs).
HMRC recently published new guidance designed to help contractors self-assess their possible liability to the IR35 rules.
They have drawn up a series of ‘business entity’ tests to help contractors understand their risk of being caught by IR35 legislation. The tests look at the following areas:
- Business premises
- Previous PAYE
- Business plan
- Repair at own expense
- Client risk
- Right of substitution
- Actual substitution
Each test asks at least one question. A Yes answer scores points and you add up all the points at the end to establish your risk category, ie how likely it is you will be investigated.
Here are a couple of examples of the test questions, a full list is included in the HMRC IR35 Guidance note:
Does your business own or rent business premises which are separate both from your home and from the end client’s premises?
For the purposes of this test, it makes no difference which of you owns or rents the business premises – you yourself or your intermediary.
Do you need professional indemnity insurance?
There’s a suggestion that, if having done the test you come out as medium or high risk you may be investigated under IR35 legislation. Those with a low risk score are advised to keep evidence to support their risk assessment.
All a little bit of a nightmare really, so if in doubt about your own circumstances read the guidance note and do take advice. There are some useful case studies which might help.
Chartered Accountant Birmingham