IR35 Business Entity Tests

The IR35 Business Entity Tests were designed to help contractors to understand the likelihood of HM Revenue and Customs deeming if your contract and day to day practices falls inside or outside IR35. Please note, these business entity tests were revoked by HMRC in April 2015 as they were not 'fulfilling their intended purposes'. 

In 2011 an IR35 forum was setup by the Government, their focus was to reduce confusion around IR35. As a result, in May 2012 the HM Revenue & Customs (HMRC) introduced twelve voluntary IR35 business entity tests and six new IR35 scenarios. These were designed to help contractors understand their IR35 status through a simple set of questions. The tests and scenarios can be found here on the HMRC website.

The twelve question test aims to build up a picture of how your business works and how you provide your services to the end client. Some of the topics the test cover are: business premises, efficiency, assistance, right of substitution, client risk and billing.

As mentioned the tests gauge how likely it is that the HMRC need to check if IR35 applies to your company, based on your current contract. Your company will be categorised into:

  • Low risk – there are no pointers in your contract that suggest IR35 may apply to you.
  • Medium risk – there are some pointers in your contract that suggests IR35 may apply for you, but some that do not.
  • High risk – there are several pointers in your contract that suggest IR35 may apply to you.

Please note this just a guide! Depending on how you answer the questions you will be rewarded points, and how many points you have at the end determines how HMRC see your status. The bands are as follows:

  • Less than 10 – High Risk
  • 10 to 20 – Medium Risk
  • More than 20 – Low Risks

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For example each of the twelve tests are broken up into test and evidence, One question is “Do you invoice for work carried out before being paid and negotiate payment terms?” The evidence would be copies of invoices and emails or letters about billing. If you raise your own invoice and you negotiate payments of terms for say 30 days as long as you have evidence of this you would score two points.

However, if you do fall into Medium or High this doesn’t necessarily mean IR35 applies to you (i.e. you are inside IR35), it just means that based on the test you are more likely to be considered by HMRC if investigated to be inside. The true outcome will require far more work by HMRC along with a thorough investigation. Obviously only HMRC can decide if anybody is indeed inside or outside however it is probably a good idea to have your contract and day to day practices reviewed by a professional.

SJD Accountancy has a wealth of knowledge in reviewing contracts for their IR35 status and can offer a free verbal IR35 contract review. If you would like us to review your contract and day to day practices or at all worried by IR35 please call our IR35 specialists on 01442 275789 or email newbusiness@sjdaccountancy.com. Or for a more detailed written review please visit our IR35 Contract Review page. 

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You may also find our pages on, IR35 Advice, What is IR35IR35 rulesIR35 Calculator and Inside IR35 - A Limited Company Guide helpful.