How to Pass an IR35 Business Entity Test

The IR35 legislation was bought by the government in 2000, in order to put a stop to ‘disguised employment’ – to prevent people from trying to reduce their tax liability and National Insurance, by leaving full time employment and then returning to the same job immediately as a contractor working through their own limited company.

So what is ir35 and how does it affect the running of your business? Well, firstly it is HM Revenue and Customs that determines which way your practices fall – whether you fall ‘inside’ or ‘outside’ of the legislation.

If you fall ‘inside’ IR35, HMRC will deem you as having the same benefits as a permanent employer. This means that you cannot claim certain expenses and will have to pay full tax and National Insurance contributions – basically, if you fall outside of IR35, then you end up taking home more of your earnings.

Some examples of being outside of the legislation are if you:

• Risk you own money through your business
• Are required to handle any loses, as well as profits
• Can bring in additional workers
• Have complete control and final say over how you work
• Use your own equipment for work – although this can be a grey area as some companies insist you use their office equipment.

What is an IR35 Business Entity Test?

HMRC have created the business entity test in order to make the IR35 legislation easier for contractors to understand. It’s made up of a list of questions available online to help those who are self-employed, get an idea of what their IR35 status may be.

The results are made up of three risk bands:

Low risk – there is a low risk that HMRC will check whether IR35 applies
Medium risk – a medium risk you will be checked, as there are some pointers that IR35 applies
High risk – you are more than likely to have an IR35 review.

If you are convinced that you are in fact ‘outside’ of the legislation, despite being at ‘high risk’, then HMRC will ask you to provide the evidence to proof this. It is not possible to avoid or ‘bend’ the rules of IR35 – having a cleverly written contract will not be enough; you must be 100% truthful and show that your working practices reflect your contract.

The tests are completely voluntary and are divided into twelve different sections:

• Business Premises
• PII
• Efficiency
• Assistance
• Advertising
• Previous PAYE
• Business plan
• Repair at own expense
• Client risk
• Billing
• Right of substitution.

IR35 Accountants

With employment status being such a complicated issue it can be really useful to gain professional advice with the IR35 legislation, and so with the help of a good IR35 accountant you can get the best guidance for the often confusing legislation.

When it comes to working out your status, going up against HMRC and disputing your IR35 status; or if you need further advice on whether to opt for IR35 insurance or not; having an ir35 accountant can be an extremely useful tool for a contractor.