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HMRC launches new IR35 business tests

As part of its efforts to simplify the IR35 guidance provided to taxpayers (particularly limited company contractors), HMRC has published a business entity test to help establish the risk an individual or business has to being the target of an IR35 investigation.

The test, and an accompanying set of six typical IR35 scenarios have been released as part of the ongoing process to overhaul the way IR35 has been administered in the past.

The IR35 legislation has not changed in any way, nor have the methods used to work out if someone is caught by the rules or not. The test, and related guidance are aimed purely at showing how HMRC assesses risk.

The business entity tests

Containing a total of 12 questions, the test aims to establish how much the participant acts as a ‘business’, rather than as an ‘employee’.

The questions, summarised below, are scored according to the importance of each answer.

You should read the full HMRC guidance for the full questions – you can download the document in PDF format at http://www.hmrc.gov.uk/ir35/guidance.pdf.

1.    Do you use premises for work purposes that are separate from your home or client’s premises? (10 points for a ‘yes’ answer).
2.    Do you have to take out professional indemnity insurance? (2)
3.    Have you had the opportunity over the past 24 months to be paid in full for a project you finished earlier than planned? (10)
4.    Do you employ workers who, between them, contribute at least 25% of your annual turnover? (35)
5.    Have you spent at least £1,200 on advertising over the past 24 months? (2)
6.    Were you previously employed on a PAYE basis by your current client? (-15 points)
7.    Do you have a business plan and a business bank account? (1)
8.    Are you liable for fixing any mistakes you make on a project? (4)
9.    Have you suffered late payment for invoices totalling 10% of turnover or more over the past 24 months? (10)
10.    Do you create invoices before being paid, and can you negotiate your payment terms? (2)
11.    Do you have the right to use a substitute worker? (2)
12.    Have you actually used a substitute over the past 24 months? (20)

When you add up your scores from each the answers, if you score 20 points or more, you are at a ‘low risk’ of an IR35 investigation. Between 10 and 20 points is a ‘medium risk’, and less than 10 is a ‘high risk’.

Business tests widely criticised

Unfortunately, the guidance has been widely criticised, particularly by members of the IR35 Forum – the body tasked with producing the guidance in the first place. 

The business groups that attended the Forum disagree with the way HMRC have scored the answers to the test questions, as they say this will lead to the majority of contractors being deemed to be at a medium or high risk of an IR35 investigation.

The whole point of the tax simplification exercise was to provide more certainty to contractors over their IR35 status.

Martin Hesketh, MD of Brookson, and IR35 Forum attendee commented:

“The business tests add complexity and further lack of clarity to this area and this can only be justified if they also deliver some genuine benefit in return - and no such return is delivered.”

Chris Bryce, chairman of contractors’ organization, PCG, was equally scathing:

 “HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35.” 

New approach to policing IR35

It is important to note that the new guidance merely outlines HMRC’s new approach to enforcing IR35, and the way an individual’s ‘employment status’ is established has not changed.

This new approach is expected to be trialled over the next 12 months, and several new specialist HMRC teams have been set up specifically for this purpose.
 

Demand for IT contractors up over 20 percent

The latest quarterly report on the state of the UK’s IT jobs market shows that the number of contract vacancies has risen by 6.6% over last quarter, and by an impressive 21.2% since April 2011.

The data, released by jobsadwatch.co.uk, is collated from IT jobs posted on the UK’s leading recruitment job boards.

Contract skills in demand

According to the survey, the average contract rates commanded by IT developers has risen by 4% over the past year.

Some of the most in-demand contract skills include C#, which has recorded a 7% increase over the past 12 months, with SAP, Java and Oracle skills also recording increased demand of a similar amount.

Other widely held skills, such as SQL, C and .NET unsurprisingly continue to be in high demand by clients – for both permanent and contract staff. Of course, these skills are essential components of most developers’ skill sets.

Over the past year, the skills that have seen the biggest jump in demand, according to the content of contract job advertisements posted online, are SAP (up over 29%), and Agile (up 27.2%).

Demand for contractors up in all regions

As has been shown in previous editions of this, and similar industry surveys, the vast majority (over 80%) of contract roles are based in the South of the country.

As an example of the heavy regional bias towards the capital, there were around 9,000 contract roles advertised in London alone between January and March; almost as many roles as the rest of the country combined.

Encouragingly, all regions recorded an increase in contract roles advertised over the past three months, although the North East and North West have seen an overall annual decrease in overall contract numbers.

Interestingly, having suffered in previous quarters, the demand for IT contractors in Scotland has seen resurgence in the first quarter of 2012, with a 9% increase in demand – the highest recorded by any region.

Has public sector demand started to recover?

Once again, software houses and financial services companies are the main users of contract workers – consuming over 80% of the market between them.

Following a period of savage cost cutting, there has been a 10.5% increase in public sector contracts advertised compared to the final quarter of 2011, albeit from a relatively small base.

Over the past twelve months, demand in the finance, software, retail and media industry sectors have all registered growth of 20% or thereabouts, with the electronics / telecoms and manufacturing industries increasing their demand for contractor workers by 4.8% and 9% respectively.
 

The problem with security cleared IT contract roles

Some IT contract roles require applicants to hold valid security clearance if they are doing to be dealing with ‘sensitive’ Government material.

However, a ‘Catch 22’ position exists whereby agencies often require contractors to be security cleared before applying for certain roles, despite the publication of Cabinet Office guidance which states that all Government contracts should be open to all applicants.

In this article, we look what the security clearance application process involves, and why many contractors find it hard to secure this type of work.

What is security clearance?

In order to protect the UK against a variety of threats, candidates for jobs which will have access to sensitive Government information and resources are vetted to ensure their suitability for the role.

Many organisations require vetting, including parts of Central Government, the Ministry of Defence, and companies providing services to the Government (such as defence contractors).

What levels of security clearance are there?

1. Baseline Personnel Security Standard (BPSS) – a limited check used to confirm the identity of job applicants (such as employment references).

2. Counter Terrorist Check (CTC) – This level includes criminal and security record checks, but is not designed to screen applicants for jobs which will involve access to sensitive information.

3. Security Check (SC) – Most contractors will require this type of clearance, where the candidate will regularly access ‘sensitive’ information, or some overseas posts.

4. Developed Vetting (DV) – The most stringent checks are reserved for applicants to roles that may access ‘top secret’ material. This type of clearance will involve an interview with a vetting officer, checks into the individual’s personal finances, and references will also be interviewed.

How to become security cleared

You cannot apply for clearance on their own account, as all individual and business applicants must have a sponsor – which will be the client in the majority of cases.

Clearance is granted for a fixed period of time, according to the clearance level, and whether or not the client is a trusted body (known as a ‘List X’ supplier).

Once a contractor leaves a project, their security clearance can usually be carried over to fresh role (subject to further basic vetting), which is why many agencies prefer to source contractors with existing clearance in place, as the SC application process can take some time.

Contractors can usually start work in a sensitive role once their application is underway, subject to further safeguards.

Problems with the current system

The Cabinet Office has published clear guidance stating:

“It is government policy that individuals should not be expected to hold an existing security clearance in order to apply for posts or contracts that require vetting, except in exceptional circumstances where such posts are short term and need to be filled urgently.”

Unfortunately, the Government advice is not legally binding, and many contractors find that the world of Government-based contracts is kept out of reach unless they already hold the correct level of clearance at the time.

If you search any of the major contract job boards, you will still find hundreds of roles advertising positions for ‘security cleared’ contractors, such as ‘SC Cleared Security Analyst’, or ‘Security cleared requirement – DV’.

Contractors’ group, PCG, has been vocal in pushing for further action to be taken against hirers who ignore this guidance, and as a result, the Government has encouraged employment industry bodies to increase awareness of the guidance amongst their member firms. However, security cleared contract roles are still hard to access for many contractors.

This is backed up by the latest research into the subject, published by BUCSIS in 2011, suggesting that the problem does not lie with the vetting process itself, but in the “culture and behaviour of those who operate the process.”