Do you really work for yourself? Take the IR35 test and find out

As a freelancer or small business owner with a Ltd company, you may think you work for yourself, but that doesn’t mean that HMRC agrees.

There are strict rules around Ltd companies, and if you’re not aware of them you may be faced with a bigger than expected tax bill. Our financial expert, Ruth Anscombe, explains what IR35 means, and how you can take a test to find out if you really work for yourself.

What are the IR35 rules?

If you’re a contractor or freelancer, you work for yourself, right?

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Actually, no, that’s not always the case. HMRC may treat you as an employee for tax purposes if the IR35 rules apply to you. If that happens, your tax bill will be substantially increased so it’s important to be aware of the issues.

IR35 rules apply if you provide services through a limited company rather than being directly employed by your client. The rules are designed to stop people using the tax and national insurance advantages of using a limited company when they would otherwise have been an employee.

In May 2012 HMRC issued some guidelines that you can use to assess your situation to determine the likelihood of falling into this category. They are called the ‘business entity tests’ and you can find them here.

The tests ask questions to help determine whether you genuinely run your own business or if you are really working as an employee. They include:

  • Do you have business premises?
  • Do you need to have Professional Indemnity Insurance?
  • Do you employ any staff?
  • Have you spent more than £1,200 last year on advertising?
  • Do you have bad debts amounting to more than 10% of turnover?
  • Can you send a substitute to complete the work?
  • Have you had the opportunity, in the past two years, to increase turnover by working more efficiently?

Each answer you give is allocated points and your points total determines the risk of you being caught within IR35 and therefore of interest to HMRC.

IR35 rules are complicated and if you think you may be caught by them you need to act promptly to avoid being penalised. There are steps you can take to ensure that your business is set up correctly, and reduce your risk. It may be that you need to make some minor changes to your working practices.

If you need some professional advice in this area, you can speak to your accountant, solicitor or a specialist IR35 compliance firm.