Whilst how HMRC will make finite In and Out of Scope decisions when IR35 comes into effect in the Private Sector is something of a secret algorithm, there has been a lot of debate around the topic of Financial Risk.
For Personal Services Companies to work independently from the End Client they should expect to incur a certain amount of Financial Risk, that they wouldn’t usually be required to if they were directly employed personnel. The degrees to what HMRC constitutes as significant Financial Risk however needs to be considered in more detail.
What is significant risk?
All risk incurred for an independent contractor to deliver their services would need to be considered as a proportionate value against the contract of work.
For example, equipment such as purchasing power tools would be relatively small when compared to the overall value of a contract, so would not demonstrate that a contractor has had to take any kind of significant risk to undertake the work. If specialist machinery equipment needs to be hired up front to complete the work though, which could not be used for any other projects, and the cost incurred would only be paid back after an invoice is settled with the End Client, then this could indicate significant risk.
What type of Financial Risk is assessed?
HMRC will concentrate of four key areas when considering the level of risk a contractor will incur:
Equipment costs – such as specialist machinery hire
Vehicle costs – such as specialist excavators
Material costs – where the contractor is expected to supply materials themselves
Other costs – such as extensive travel and accommodation for lengthy stays
Where tools and equipment are freely available to use on site however and a contractor chooses to use their own through personal preference, this may not constitute a significant financial risk. Similarly, where the End Client will support travel and accommodation expenses through a pre-agreed rate, this transaction is comparable to direct employment.