Personal service companies (IR35)

HMRC has issued new guidance on the IR35 regime that sets out some basic risk factors to consider in determining whether or not the legislation applies.  The intention is to increase the number of investigations into contractors.

HMRC’s guidance includes 12 basic tests and some examples.  Some key issues that HMRC recommend be considered are:

• Does the business own or rent business premises separately from the client’s premises and from the home address?
• Does the contractor need professional indemnity insurance?
• Has the business had the opportunity, in the past two years, to increase its revenue by working more efficiently?
• Does the business employ workers who contribute significantly to turnover?
• Has the business spent more than £1,200 on advertising in the past year?
• If the contractor used to be an employee, have there been major changes to your working arrangements?
• Is there a business plan with a regularly updated cash flow forecast, and a separate business bank account?
• Would the business have to bear the cost of rectifying mistakes?
• During the past two years, has the business had bad debts amounting to more than 10% of yearly turnover?
• Does the business invoice for work carried out before being paid and negotiate payment terms?
• Is there a right of a substitution?
• If so, has the business hired anyone in the previous two years to do the work it has taken on?

The questions are scored and this gives an indication of the risk of IR35 applying.
 

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