New IR35 guidance unveiled by HMRC
New guidance for freelance limited company owners to self-assess themselves under the 'disguised employment' rules – IR35– was formally launched by the tax authority yesterday, Wednesday May 9th.
In a long-awaited addition to its website, HM Revenue & Customs unveiled almost 50 pages of new guidance (PDF) informing taxpayers of its fresh “risk-based approach to checking customers’ compliance with the intermediaries legislation.”
“It tells you how to work out which risk band you are in,” HMRC said, pointing to low, medium and high risk bands. “And it tells you what the risk bands mean you have to do.
“It [also] gives you example scenarios to illustrate when and why IR35 will apply to an engagement and when and why it will not… [however,] this guidance is not a comprehensive guide to IR35.”
In the guidance, the Revenue confirms that the IR35 Forum has helped it draw up a set of ‘business entity’ tests, comprised of 12 questions, which the self-employed can use to help gauge which risk band they are in.
Freelancers who emerge as ‘low risk’ will be able to claim their exposure to IR35 is small, alongside giving evidence of their circumstances “in particular your working arrangements,” in the event that HMRC writes to them about IR35.
“If you prove to our satisfaction that you are outside IR35 or in the ‘low risk’ band, then we will close our IR35 review,” the guidance states.
“And we will undertake not to check again whether IR35 applies to you for the next three years, provided that the information you have given us is accurate [and that] your circumstances – and, in particular, your working arrangements – do not change in that time.”
In contrast, “suppose IR35 applies to you,” HMRC said, addressing freelancers who emerge as medium or high risk. “Then IR35 may treat your intermediary as if it had made a payment triggering PAYE and NIC – that is, your intermediary may have to account for actual PAYE and NIC on a deemed payment.
“Your intermediary can reduce this deemed payment if it pays employment income under PAYE and NIC before the end of the tax year (5 April). If it accounts for enough PAYE and NIC under the normal rules, it will reduce the deemed payment to nil.”
Adding another cautionary note, HMRC advised: “The business entity tests and the risk bands will help you work out the risk that we will check whether IR35 applies to you. But they will not tell you for sure whether IR35 applies to you.”
Firstly this is because every case depends on its own individual facts – “just because you are in the ‘high risk’ band or ‘medium risk’ band, that does not automatically mean that you are within IR35,” the guidance says.
“Second, the business entity tests look at how your business works overall in order to gauge the risk that we will check whether IR35 applies to you,” HMRC explained. “But, for the purposes of calculating PAYE and NIC under IR35, you need to consider each engagement separately.”
The IR35 Scenarios also need separate consideration. According to the guidance, the business entity tests look at a business "as a whole" to gauge how likely it is that the business has entered into an engagement to which IR35 applies.
“But they do not focus on individual engagements. Therefore, the example scenarios…have no bearing on the business entity tests.”
Elsewhere, HMRC said that freelancers “need” to retake the business entity test again, and potentially gather and retain new evidence of their working arrangements, in the event that their working “circumstances change.”
But it reminded: “The tests are completely voluntary – we will not make you take them. If you do take them, you do not have to tell us which risk band you are in.”
Freelancers wanting further advice were invited to call HMRC’s IR35 helpline – newly staffed by “specialists” on the rule – for “one-off queries” or more considered enquiries, such as contract reviews.
The Revenue reflected: “The helpline and review service are staffed by HMRC specialists in IR35. Both are independent of our compliance teams – if you ask them about IR35, they will not pass on what you tell them to other people in HMRC.”