*sigh* Here we go again. HRMC have released a ‘business entity’ test to ‘help’ businesses decide if they are a business or not. Okay, maybe not. This is aimed at contractors like myself—those of us who have elected to work for ourselves and freelance skills to companies rather than working for an employer. If you’re not familiar with the IR35 debate then you’re probably not a freelancer in the UK and this post probably won’t be of any interest to you (unless you’re thinking of making the change).
Now, to be fair, HRMC do say that this test should not be taken as definitive and freelancers should consider all their circumstances in coming to a decision about their IR35 status, so what I am saying here applies only to the usefulness of this test to me (and I consider myself fairly typical of freelance workers in the IT field).
Let’s take a look at this test.
Test 1, worth +10 points, ‘Business premises test’; Does your business own/rent separate business premises which are separate from your home & client’s premises?
No. I do have a very well equipped and comfortable office in my home though. It is a separate room that serves only as an office. I carry business insurance covering my business equipment because my normal household insurance would not cover it. But, apparently, none of this matters unless I pay an entirely unnecessary rent, or buy property, to house that same office. Because I am not a wasteful moron I rent office or meeting space WHEN I NEED IT. (Ironically, if I were wasteful or egomaniacal enough to rent a superfluous office I would score 10 points on this test and already put myself into ‘medium risk’, see below.)
Test 2, worth +2 points, ‘PII test’; Do you need professional indemnity insurance?
Yes. Most of my contracts demand it and my company would carry it anyway because I am not a moron and I realise that, should my company be responsible for direct damages I COULD BE SUED. I have no desire to lose my business. I also carry public liability insurance (for the same reason) and employers liability insurance (because as a company employing myself, I—or at least my company— has to).
Test 3, worth +10 points, ‘Efficiency test’; 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?
Kinda. I work a professional day. If I get my work completed early I leave, otherwise I stay until it’s done. I’m not sure HRMC see this positively in the light of this test, but that’s the reality.
Test 4, worth +35 points, ‘Assistance test’; Does your business engage one or more workers who generate at least 25% of your business turnover annually?
No. I work alone. I have no desire to take on employees (have you seen the arse-breaking employment legislation?), although I would gladly subcontract work if the opportunity ever arose. However, that’s not the nature of what I do, nor is it something that especially enthrals me (I became freelance to get away from this sort of entanglement), so I fail on this test.
Test 5, worth -15 points (yes, that’s negative); 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?
No. That was an easy one. I wish they were all that straightforward and clear cut.
Test 6, worth +2 points, ‘Advertising test’; Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months?
No. That’s not the way my line of work tend to operate. That said, I do pay for the upkeep of a business website, although (again, not being a moron) I don’t pay anything like £1200 for that. I did explore advertising early on in my career and it proved to be uneconomical, why would a well run business pay for advertising that was ineffective?
That said, I do spend time promoting myself online (contributing to forums, writing a professional blog, maintaining several resource websites). Does that count? I’d call it advertising, not sure HMRC would agree and even if they did I’m nor sure how they’d value it. If I charged pro rata for my time doing these things I’d certainly be way over the £1200.
Test 7, worth +1 points, ‘Business plan test’; 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?
Mixed bag on this one. No, I do not have a business plan with cash flow forecasts. I don’t need one, if I did, I’d write one. Yes, I do have a separate business bank account (actually my company has a bank account, not me) and yes it is identified as a business bank account by the bank.
Test 8, worth +4 points, ‘Repair at own expense test’; Would your business have to bear the cost of having to rectify any mistakes?
This is another muddy water one for me. Again, I work a professional day and as such if I screw up I have to work longer hours to correct things and so I make less per hour worked. In this sense I qualify for these points, but again, I doubt HMRC see things this way.
Even on contracts that do pay for additional hours worked outside a professional day, I don’t charge for corrective work (but that’s just me, it seems the right thing to do, it’s seldom a contractual obligation).
Test 9, worth +10 points, ‘Client risk test’; Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover?
No. I’m not a fucking idiot. I work for large companies with sound records, or I do a credit check on companies I am concerned about. Sure, it’s still possible to get burned, by I don’t see how running a business badly, or being unlucky, is any indicator of being a business (it’s more an indicator that perhaps you shouldn’t be in business).
Test 10, worth +2 points, ‘Billing test’; Do you invoice for work carried out prior to being paid & negotiate payment terms?
Yes on both counts, although I seldom have a need to negotiate payment terms as their fairly standard across my industry. Sometimes clients, or agents, self-bill, but I still review and check invoices so generated.
Test 11, worth +2 points, ‘Personal service test’; Does your business have the right to send a substitute?
Test 12, worth +20 points, ‘Substitution test’; 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 & for paying the substitute or sub-contractor.
No. I’m in good health and have never needed to provide a substitute. Again, it’s hard to see how this goes to demonstrating you’re a business. All it does is demonstrate that the substitution clause in any contract worked as it should.
Anyway, after all that I reckon I score a sound 6 (tests 2, 10, 11). A questionable additional 7 points (tests 6, 7, 8), if HRMC accept that; maintaining a website and contributing to other professional forums (accounting my time on a rate pro rata with my clients) is advertising; barring a business plan I meet the rest of test 7; working a professional day means I lose money recovering from my mistakes. And another 10 points (test 3), if HMRC accept that; working professional days provides opportunity to increase income (work shorter hours for same payment). I could even squeeze another 10 it they accept that a dedicated office in my home makes more sense economically than renting the same space elsewhere, but since when has good business sense mattered in this debate?
This puts me, on the first assessment (6 points) in the high risk category (0–10 points), on the second assessment (13 points) in the medium risk category (10–20 points), and on the third assessment (23 points) in the low risk category (20+ points).
So, all-in-all, not much help in this test. There are still too many ambiguities, too many issues where I would argue one way but I could see HMRC arguing the other.
I continue to maintain that I am in business on my own account. I control, so far is practicable, my own time and my own work. I provide to my clients skills that they do not necessarily have. I employ an accountant, pay for business insurance to cover my home office and equipment, operate a company according to legal requirements, pay for professional indemnity, public and employers liability insurance, I have a home office dedicated as a working space. I select my clients, negotiate my rate and payment terms. There is no mutuality of obligation between my clients and myself. I maintain a right of substitution on all work because, although I am often a named consultant (a common enough arrangement) my clients are employing my company to carry out work, not me.
I get no pension, no paid holidays (bank holidays suck), no sick-pay, no training (other than that mandated by them, e.g. ‘orientation’ or health and safety), no insurance cover, no car, nor any other ‘employee’ perks from my clients (nor do I expect them I’M NOT THEIR EMPLOYEE!).
Yet, despite all this, I still face uncertainty about IR35, uncertainty that, although I’ve learned to live with it, does cost me time, money, and just enough stress to make life ‘interesting’ every year.