If your client provides services through their own personal service company they will be aware of the tax law known as IR35. This tax rule imposes an extra charge on their company, if they would be treated as an employee of their customer or customers, if your client worked for the customer directly. It is very difficult to pin down when IR35 should apply, as it depends on the relationship between the contractor and the customer, which will be different in every case.
The Taxman thinks he can generalise about what makes some companies fall within IR35 and others escape it. He has drawn-up a set of business entity tests, complete with a scoring system, to help your client judge whether their business would be at high, medium, or low risk of being investigated for falling under IR35.
These business entity tests are not derived from the tax law. They merely represent the Taxman's view of the risk of a business falling within IR35.
The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner's home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.
If your client choose to use the IR35 business entity tests, they don't have to declare their score to the Taxman, the tests are merely for your clients own guidance. However, if they are concerned that the business entity tests produce a high risk score for their businesses, you should discuss with them as to why this is the case. Are there any changes which can be made to the way your clients business operates which would make it less likely to be caught by IR35?
