IR35 Business Entity Tests

HMRC has since revoked Business Entity Tests as of April 2015 as they were not ‘fulfilling their intended purposes’. 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 fall inside or outside IR35.

IR35 Test vs Business Entity Test

In 2011, an IR35 forum was set up by the Government, with their focus on reducing confusion around IR35. As a result, in May 2012, 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 set of questions. The tests and scenarios can be found 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 include business premises, efficiency, assistance, the right of substitution, client risk and billing.

IR35 Business Entity tests were used to gauge how likely it is that the HMRC needs to check if IR35 applies to your company, based on your current contract. Your company would 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 suggest 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.

Depending on how you would answer the questions, you would be rewarded points. Your points tally would determine how HMRC saw your status.
Please note this is just a guide. The bands were:

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

For example, each of the twelve tests is broken up into test and evidence. One question was “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 or that 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 IR35. The true outcome will require far more work by HMRC along with a thorough investigation.

IR35 Tests in 2020

Only HMRC can decide if anybody is indeed inside or outside IR35, but it is always a good idea to have your contract and day to day practices reviewed by a professional. Having your contract reviewed, especially in light of the draft IR35 legislation reforms, is the only way to know where you stand.