IR 35 – new business entity tests

HMRC publishes guidance on its new approach to dealing with potential IR35 cases.

The HMRC guidance Intermediaries Legislation (IR35) Business Entity Tests/Example Scenarios sets out HMRC's view on how it will apply the existing legislation and how it will assess risk of non compliance. The guidance introduces a ‘scorecard’ system which companies are expected to use to determine their risk of falling within IR35. 

The new guidance in summary

The guidance outlines HMRC’s new approach to dealing with potential IR35 cases. It includes record-keeping requirements, business entity tests and example scenarios. 

Under the new approach, businesses which potentially fall within IR35 are expected to ‘self-assess’ their IR35 ‘risk’. The level of risk is assessed using a scorecard system, with different factors having a weighted score. Once the business has carried out its IR35 assessment, it or specific contracts will fall in to one of the following categories: 

  • low risk 
  • medium risk 
  • high risk. 

If HMRC feels that a business may fall within IR35, it will write to the business and ask whether it has ‘thought about IR35’ and seek to establish which risk category the business has assessed itself as falling within.

It is unclear at this stage how many IR35 query letters may be sent out but, given HMRC’s broad new powers under Finance Act 2008, Schedule 36, if the business responds that it does not consider itself to fall within IR35, HMRC are likely to ask for the business's scorecard, together with supporting evidence.

The risk bands

As already mentioned, the risk evaluation will work on a scorecard system and there will be three risk bands:

Risk bandPoints score
Low riskMore than 20
Medium riskMedium risk 10 – 20
High risk

Less than 10

There are several points worth noting. The tests do not reflect all of the factors that the tribunals usually consider when deciding an IR35 case. Some are included, but others, such as the following, are not: 

  • extent and degree of control exercised by the client over the worker;
  • mutuality of obligations between the worker and the client; 
  • provision of equipment; 
  • the existence of employee rights; 
  • whether the worker was part and parcel of the client's organisation; 
  • whether the worker free to undertake other work; 
  • mutuality of intentions. 

Curiously, some of these factors are alluded to in some of the example scenarios contained within the guidance but do not form part of the risk assessment scoring. 

Some of the ‘big score’ tests – for example the business premises test – clearly do not apply for many businesses and business start-ups in particular. Also, with advances in technology, it is perfectly feasible that many businesses operate from the home of the proprietor. The assistance test is also difficult for many new businesses which often rely on the specialist skills of the proprietor. 

The scoring system does reflect the importance of a substitution clause but, following the Autoclenz case, there is a much greater weighting for actually invoking the substitution clause. The weighting of the scoring means that if the contract has a substitution clause and actually uses a substitute, this will automatically take the worker into the low risk category. 

If a business finds that it is unable to meet the business premises test, the efficiency test, actual substitution test and the assistance test, then a business cannot fall within the low risk category. 

What the bands mean

The fact that a business falls within the medium or high risk categories does not automatically mean that IR35 will apply. They are intended to identify those cases that IR35 is most likely to apply to, and the lower the score, the greater the likelihood that a case will be selected for an IR35 review. It is at the review stage that the additional factors listed above, such as mutuality of obligations etc, would be considered. The actual application of IR35 will always come down to employment status factors that must be tested against case law going back to the Ready Mixed Concrete decision.


The guidance sets out the types of evidence that businesses should keep in order to substantiate their ‘scorecard’. It is important that clients are made aware of the record-keeping requirements. 


The new guidance has caused controversy and many genuine trading companies could; by just referring to the scoring system, find themselves in the medium or high risk categories. They should make sure they also consider the scenarios and existing case law. 

It is clear that there will be an increased number of IR35 investigations in the coming years. It is also quite clear that HMRC will have expected a business to have referred to its guidance and will expect a business to furnish evidence based on the guidance to them. 

However, it should be remembered that there has been no change in law and so if a case is taken to tribunal, it will need to be considered in line with established case law. It is of paramount importance that when considering contracts and self employment evidence is collected and collated at the time the contract is discussed and made.