Contractors' Questions: Will renting an office reduce my IR35 risk?

Contractor’s Question: I understand that, if I end up in court under IR35, that whatever points I scored on the new points-based system for IR35 wouldn’t matter.

But I have an opportunity to rent an office/workspace, which I plan to use once a week. This fairly cheap arrangement - renting a local office - could get me 10 points on the Business Premises test, and move me into the lower end of the medium-risk category, if I was asked to demonstrate my IR35 position to HM Revenue & Customs.

Renting the office would also give me a place to run a faster broadband connection and to meet the odd prospective client. At the moment, my registered office is my home, so that’s not ideal, and my main client’s office isn’t exactly appropriate either!

Would an expert on IR35 see this potential workspace that I could rent, monthly, as a waste of money, or would it likely get me the points on the IR35 points-based system?

It would no doubt help with my company’s expansion plans too (I have more business and a website in the pipeline), but some say HMRC would ‘see through’ the rented office when assessing me under the IR35 legislation. I can’t believe that would be the case assuming I do actually use it and if it matters to my business. Or another concern, would the timing of when I began renting the office likely to be significant (i.e. after the points-based system was unveiled would be suspicious to HMRC)?

Expert’s Answer: Firstly, the business tests points do matter.

Why IR35 point-scoring counts

They actually matter very much if you score as low risk and satisfy HMRC of the score you achieved by providing appropriate evidence. The points matter because HMRC has given assurances that where someone is low risk they will close the review as quickly as possible and leave you alone from an IR35 perspective for three years.  This means that as “low risk,” it is highly unlikely that your case would get anywhere near a court in the first place.

No point manipulating the test

However, there is absolutely no point in manipulating the business entity tests and certainly no point in getting into “the lower end of medium risk”.  IR35 is all about “relevant engagements” so if you have a contract for 4 days a week which does not require you to use your own premises, then having business premises is worthless in the IR35 debate on that particular contract.

Breach of director’s duties?

It is also worth remembering that you have duties as a director, which entail ensuring value for money and justifying the spending of company funds. If a faster broadband connection is necessary and only achievable by renting premises and you do actually meet clients at these premises then fine, but it may be difficult to justify (the cost) solely for the purposes of meeting some HMRC risk of investigation tests.  

IR35 is set in stone, business test isn’t

Lastly, remember that the IR35 legislation has not changed and we now have specialist HMRC IR35 teams and lots more investigations. The new processes and the business tests and their scores are running as a “test and learn,” or pilot, for the next 12 months. Depending on the results, the scores could change or the tests could be dropped altogether.  

So save your money

My advice, therefore, is save your money and do not rent premises until you are ready to expand. Don’t forget there is so much you can do now to establish and protect your IR35 position based on the reality of your working arrangements.  If you are investigated for IR35 and receive an IR35 letter, HMRC will be keen to hear why you consider that the contracts you entered into over a particular past period are outside IR35 and how you came to this decision. Yes, they will also be interested in your scores if you choose to take the tests; but unless you are low risk then they will count for little.             

The expert was Kate Cottrell, a former tax inspector and co-founder of IR35 and Employment Status advisory Bauer & Cottrell.

 

Wednesday 25th July 2012