Paymatters calculator explains how much you need to pay in tax and National Insurance Contributions (NIC’s) in the event of being caught by IR35.

The starting point of the calculation is to add up all the income generated from the services you performed.

The good news is you do then get a 5% deduction based on the income in calculating your deemed payment. This is to reflect the costs of running your own limited company.

You can also deduct additional expenses incurred by your company provided you would have been able to claim tax relief for these items if you also would have been able to claim relief if you had incurred these working as an employee of your client.

You may also be able to claim for travel and related meal and accommodation costs incurred in doing your job or in travelling to and from a temporary workplace you had to attend to perform your tasks.

You also deduct any earnings paid to your self for which you have already accounted for PAYE and NIC’s, any employers national insurance payments, pension payments made by the company on your behalf and allowable capital allowances .

The calculation of the tax and NIC’s is then the same as if you had been paid the deemed payment as a salary.

HMRC provide a step-by step guide: IR35 Deemed Payment Calculator

PayMatters calculator is available by calling Paymatters on 0800 121 6513.

The most obvious complaint identified by PayMatters is that it’s too complicated to understand. HMRC have tried to counter this by issuing guidance and the IR35 Business Tests but these too don’t give a definite YES or NO answer as to whether people are caught by IR35.

Also these are based on HMRC’s view of IR35 rather than case law. Famously when reviewed by the Courts HMRC have often lost high profile IR35 cases.

This gives rise to the complaint that IR35 is too subjective!

At PayMatters we recommend to our clients that for each new contract a review is performed by a specialist company such as Bauer & Cottrell. PayMatters IR35 Reviews

HMRC also offer free IR35 advice about their reviews: http://www.hmrc.gov.uk/ir35/assistance.htm

PayMatters Complaints can be followed by following our RSS Feed.

For advice on working through your own limited company please call Paymatters on 0800 121 6513.

A Paymatters review of IR35 has highlights the key developments:

http://www.hmrc.gov.uk/ir35/

This web page highlights what MSC Legislation and IR35 are, when IR35 applies and what happens if caught by IR35.

http://www.hmrc.gov.uk/ir35/guidance.pdf

HMRC introduced IR35 business tests which were designed to highlight whether you should consider yourself at risk of IR35. They highlight whether an HMRC review may consider you within IR35. The tests have been criticised in some quarters and while they make clear HMRC’s approach to IR35 do not mean that HMRC would necessarily be successful in a case based on these tests. HMRC make clear they are for guidance only.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/275993/Interaction_of_Personal_Service_Companies_with_the_Proposed_Changes_to_Chapter_7_S44-47_ITEPA_2003.pdf

Interaction of Personal Service Companies with the Proposed Changes to Chapter 7 S44-47 ITEPA 2003 (The Agency Legislation)

This note sets out HMRC’s view on the way the proposed changes to the agency rules interact with IR35. It is in response to concerns that have been raised during the consultation on Onshore Employment Intermediaries: False Self-Employment.

HMRC highlight that as is currently the case, the proposed Agency legislation will not generally apply where a worker is engaged via a PSC.

https://www.professionalpassport.com/Contractors/IR35/158

Professional passport who annually review Paymatters provide an excellent section covering all aspects of IR35.

For further PayMatters Reviews please follow our RSS feed.

The HMRC guidance explains what the IR35 Business Entity Test is, what IR35 is, what the high, medium and low risk scores of the business test mean and how the test scoring works.

The result score of high to low risk is the risk that HMRC will perform an IR35 review or not respectively.

There are 12 questions listed below. A YES to any of the questions scores you points. The more points you score the lower the risk.

The questions have differing point scores.

An overall score of 0 to 10 gives a HIGH risk score;
10 to 20 MEDIUM risk; and
Greater than 20 LOW risk.

If HMRC think IR35 may apply to you then they will write to you to ask if you have considered IR35.
If you are subject to a review and can prove that you are in the low risk category the review will be suspended and no further review will take place for 3 years. If you are not low risk then HMRC will seek further evidence to make their judgement.

If IR35 does apply to then your company would have to pay PAYE and National Insurance (NIC’s) on the deemed payments you have made ie they will be treated as wages rather than a dividend distribution.

It explains the 12 different elements of the Business Entity Test which are:

The Business Premises Test (10 points for premises separate from your home);
The PII (Professional Indemnity Insurance) Test (2 points if you need PII);
The Efficiency Test (10 points if in the last 2 years you have been able to make more money by being more efficient ie you still get paid full contract value if finish a job early);
The Assistance Test (35 points if other people bring in more than 25% of company’s income);
The Advertising Test (2 points if spent more than £1,200 in last 12 months);
The Previous PAYE test (minus 15 points if you were previously employed by the end client in last year);
The Business Plan Test (1 point for having a regularly updated plan/cashflow forecast and 1 point for having a business bank account);
The Repair at Own Expense Test (4 points if have to rectify any mistakes at own cost);
The Client Risk Test (10 points for being unable to collect payment for any invoices in last 2 years that accounted for 10% of your turnover);
The Billing Test (2 points for invoicing before payment and negotiating payment terms);
The Right of Substitution Test (2 points if contract has the right to provide a substitute to perform work); and
The Actual Substitution Test (20 points if in the last 24 months you have employed someone to perform work that you were originally going to perform).

The 5 example scenario’s are for the made up names Emma, Juanita, Hamish, Barbara and Costas.

Barbara is the case that is deemed to be caught by IR35.

Her facts are:

Intermediary details
Barbara is the sole director, shareholder and worker of B Ltd.
Barbara specifically set up B Ltd to win the engagement.

Contractual chain
B Ltd contracts with an agency, which in turn contracts with the end client.

Payment terms
B Ltd charges out Barbara by the hour and invoices monthly.

Personal service
Barbara is highly skilled and an expert in her specialist field. So it is unlikely that anyone else could do the work.
Engagement details
The end client has not engaged Barbara for a specific task, and can move her to a variety of tasks.
Barbara works as part of a team of employees of the end client. A manager of the end client manages Barbara’s project.
The end client’s employees have to work from 9am to 5:30pm. The end client requires Barbara to work those hours too.
The end client decides which parts of the project Barbara will carry out.

There has been no downtime on the project. But the end client would expect Barbara to ‘busy herself’ with other aspects of the project if she ran out of work.

The end client insists on Barbara doing the work at the end client’s premises.

The end client provides all the equipment Barbara needs to do the job, including a laptop and a calculator.
Barbara has to ask the end client if she wants to take time off. But leave is unpaid.

‘Barbara’ – reasons why IR35 applies

Control
The end client has control over what Barbara does and where, when and how she does it. So the end client has extensive control over Barbara. This is a strong pointer that IR35 applies.
The end client has not engaged Barbara for a specific task, and can move her to a variety of tasks. This suggests that the end client has control over what Barbara does. It is a pointer that IR35 applies.
Barbara has to ask the end client if she wants to take time off. So the end client has control over when Barbara works. This is a pointer that IR35 applies.

Personal service
The contract says nothing about substitution. Because Barbara is a specialist, it is unlikely that she could find a substitute with the right skills. Taken together, these facts suggest that the end client requires Barbara’s personal service. This is a pointer that IR35 applies.

Other factors
The end client provides all the equipment which Barbara needs. This often happens. But it is a weak pointer that IR35 applies – depending on the nature of the services.
Barbara works as part of a team. Many self-employed contractors are part of a team in some way. But Barbara is part and parcel of the team, just like the end client’s employees. This is a pointer that IR35 applies.

What can you do to score higher?
Consider getting an office and doing £1,200 of advertising.
Have a regularly updated forecast, have a separate bank account.
Obtain some PII if applicable.
Take on a business partner or employees.
Ensure your contracts are IR35 friendly in respect of fixed contract price, ability to provide a substitute and rectifying at own cost.
Perform your own invoicing and pay negotiations.

The full guidance is available via: IR35 Guidance. HMRC do explain that the guidance is not a Comprehensive Guide to IR35. The HMRC IR35 guidance does give the relevant links for further guidance.

If you are a contractor worried about IR35 and the new HMRC IR35 Business Test please call us on 0800 121 6513.

HMRC also offer free advice and will if requested review your contracts to confirm whether they consider it outside or inside the scope of IR35. If outside IR35 they will give you a reference that you can quote if you are subject to an HMRC review.

The long awaited HMRC Business Entity Test that was rumoured to being launched on 7th May 2012 has failed to materialise. Perhaps this is just an oversight as a result of the 7th being a bank holiday??

Or are HMRC tweaking the busines test itself?

We will be monitoring the HMRC website today for any announcements and will publish as soon as there is any news or the test is launched.

What is IR35 Insurance?

IR35 Insurance is available and generally helps to cover your professional costs in the event of an HMRC review or inspection.

In some instances this will only cover initial costs and not the costs of an appeal if you were to lose. It is also highly unlikely to insure you for the additional tax you may be subject to.

IR35 insurance will often require that you use the insurance company’s own advisors rather than your own.

Historically there have been 1.4m contractors working in the UK and about 1,000 a year HMRC inspections.

What is important therefore is that you operate as compliantly as possible.

For advice on operating your own limited company or alternatives that are outside the scope of IR35 (ie working through an umbrella company or PAYE) and therefore no need for IR35 insurance please call PayMatters on 0800 121 6513 or visit: www.paymatters.co.uk.

HMRC have been in discussions with industry groups about clarifying their approach regarding IR35.

HMRC have historically been involved in (and in a number of cases lost) some high profile IR35 cases.

Because of this the rules regarding IR35 do not appear to be 100% clear for either side.

The Office for Tax Simplification (OTS) have therefore pushed for more clarifaction.

In May 2012 HMRC are issuing an IR35 Business Test.

This will rank answers to a number of key questions to see if contractors operating through their own limitied companies are at a high, low or medium risk from an HMRC review. This still doesn’t however give a definite answer as to whether, if HMRC did perform a review, that you would be held liable!

For this reason many contractors working through their own business are expected to switch to working through an umbrella company.

If you are worried about HMRC, IR35 or any other contractor tax issue please call PayMatters on 0800 121 6513.

HMRC have announced that they will be launching in May 2012 an IR35 Business Test.

The purpose of the IR35 Test is to determine the level of risk posed by the business in terms of IR35. It is made up of a series of questions. The answers to these questions are given a score and the total score will determine whether the business (PSC or personal service company) is high, medium or low risk in terms of an HMRC intervention for IR35. The higher the points score the lower the risk result.

The questions and scoring solutions have been published as:

Business Entity Tests

1. Does your business own or rent separate business premises which are separate from your home and client’s premises?

Yes = 10 points

2. Do you need professional indemnity insurance?

Yes = 2 points

3. Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently e.g. by finishing the work/project earlier than projected but still receiving the full agreed payment?
For example you originally agreed with the client/engager that the work would take 3 months and cost 10,000 but you finished in 2 months and still received the full 10,000 at the end of the 2 month period.

Yes = 10 points

4. Does your business engage one or more workers who generate at least 25% of your business turnover annually?

Yes = 35 points

5. Have you been engaged on PAYE employment terms by your current client/end user within the last financial year with no significant changes to your working arrangements?
If you are doing the same work you should answer yes to this question. Current engager also includes working at a different location owned by your engager or working at a different company but which is connected e.g. part of the same group.

Yes = minus 15 points

6. Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months?

Yes = 2 points

7. Does your business have a business plan with cash flow forecast, that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank?

Yes = 1 point

8. Would your business have to bear the cost of having to rectify any mistakes?

Yes = 4 points

9. Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover?

Yes = 10 points

10. Do you invoice for work carried out prior to being paid and negotiate payment terms?

Yes = 2 points

11. Does your business have the right to send a substitute?

Yes = 2 points

12. Has your business hired anyone in the last 24 months to do the contracted work you have taken on? This could be demonstrated by sending a substitute in your place or by sub-contracting, but in both cases your business remains responsible for the work and for paying the substitute or sub-contractor.
You can still pass this test if you had to notify the end client of the name of the individual you sent as a substitute.

Yes = 20 points

IR35 Business Entity Test results

0-10 points = High Risk
11-20 points = Medium Risk
21 points and over – Low Risk

At PayMatters we would be happy to perform the above IR Business TEst for you. Please call us on 0800 121 6513.

The latest IR Forum minutes have been published by HMRC: IR35 Forum Minutes

The IR35 Forum Minutes outline the new IR35 Business Test which is descibed in the minutes as:

“The business test to determine the level of risk posed by the business in terms of IR35 is made up of a series of questions. The questions are weighted and dependent on the answer to the question they will provide either a plus or minus scoring. The scores totalled will determine whether the business (personal service company) is high, medium or low risk in terms of an HMRC intervention for IR35″.

This business test is expected to go live on HMRC’s website in May 2012.

If you are worried about IR35 and are considering switching to working through a PAYE Umbrella Company please call PayMatters on 0800 121 6513.

PCG are quoted as saying:

“PCG was formed by passionate and far-sighted freelancers who instantly recognised the harm that Gordon Brown’s IR35 proposal would inflict.

“Ten years on, they have sadly been proved right, and the unfairness of this measure remains evident. In these times of economic difficulty, the Government should be doing everything it can to remove barriers to enterprise – this must include the abolition of IR35.”

The PCG says that IR35 remains damaging to the UK economy because:

UK freelancers face a perpetual threat of a costly and distressing HMRC investigation under IR35;
Expert advice is needed to navigate IR35 successfully;

IR35 obliges freelancers to spend time and money assessing their status as best they can, with contract reviews, tax investigation insurances and negotiations with clients and agencies – all of this effort would be better spent generating wealth for the UK economy; and

The Government has acknowledged that it is unable to implement IR35 fully.
According to the Liberal Democrat MP for Solihull’s EDM, the effort contractors spend on defending their status as a legitimate and vital component of the UK’s flexible workforce would be better spent on generating greater income and wealth for the UK.

Furthermore, claims Burt, there is no evidence that IR35 actually achieves its aim of bringing in greater tax revenues. Her EDM cites evidence from the Professional Contractors Group that, of the 1,468 IR35 cases monitored by the trade body, 1,462 have provided no extra tax.

IR35.tv Comment:

There is no doubt contractor dislike IR35 and would rather it didn’t exist. Nobody likes paying tax and any move that could lead to us all paying less tax is good!

In practice though is it fair for contractors to pay less tax than their employed counter-parts?

What the above analysis excludes is that a large number of contractors have set-up their own limited companies or joined Umbrella Companies and are now paying tax correctly. It us therefore unlikely that the Government rock the boat. This would definitely affect the Governments cashflow if it enabled huge numbers of contractors to stop paying PAYE and become self-employed once more.