The ranks of contractors opting to work through umbrella companies could well be about to swell if HMRC ploughs ahead with its unilateral plan to weight criteria for assessing IR35 liability. Further details are emerging about the questions and weightings likely to be used.
Although the business entity test has been deferred until May, questions have been weighted according to HMRC’s own criteria. Only contractors scoring 21 points or above will be designated as ‘low risk’, while those scoring 11 to 20 points will be considered ‘medium risk’ and those scoring 0 to 10 points as ‘high risk’.
Questions such as “Were you previously a PAYE employee for the client you are now contracting for in the last financial year?” will count as minus 15 points, and if professional indemnity insurance is required (very common in the contracting community), contractors will score a paltry two points. Limited company contractors with dedicated business bank accounts and frequently updated business plans will score a mere one point. Those with employees contributing 25% to turnover – a tiny minority – will score a thundering 35 points, taking them safely into the low risk category.
If a contractor has been unable to recover payment amounting to over 10% of annual turnover in the last two years (a not uncommon scenario), the weighting is ten points.
These are but a snapshot of the questions and weightings HMRC appears determined to implement, against the advice of business groups. As they stand, it would appear that the majority of contractors currently working through limited companies in the UK would find themselves at medium to high risk of being caught by IR35.