Possibly a very stupid question about IR35

[ChimpMaster]

OK I understand about IR35 being a "working conditions" rules based tax etc but I was just thinking about the following.

Assume your Ltd grosses say £100k a year but you only pay yourself a salary of say 20k, and leave the remainer in the Ltd. You never pay yourself a dividend.

Now if HMRC came and slapped you with the IR35 badge, would you be forced to take the £80k money out of the company and to pay PAYE on it?

i.e. Do they only look at the overall £100k "income" that you as an individual earns? Or would they be inclined to apply PAYE only to any dividends that your Ltd paid out?

[VectraMan]

i.e. Do they only look at the overall £100k "income" that you as an individual earns?

Yes: you pay the tax on all the income to the company (well 95% of it). It doesn't matter whether you've paid it to yourself or not.

So potentially you could be working an IR35'd contract to fund other parts of the business, so paying yourself much less. You'd then be taxed on money you haven't earned.

[Spacecadet]

Yes: you pay the tax on all the income to the company (well 95% of it). It doesn't matter whether you've paid it to yourself or not.

So potentially you could be working an IR35'd contract to fund other parts of the business, so paying yourself much less. You'd then be taxed on money you haven't earned.

isn't reinvesting money within the business a definite pointer to being a proper business?

Of course if the money just sits there and does nothing then you probably won't have a leg to stand on

[NotAllThere]

OK I understand about IR35 being a "working conditions" rules based tax etc...

I hope the etc. refers to the actual written contracts.

[VectraMan]

isn't reinvesting money within the business a definite pointer to being a proper business?

You'd think so, but then we always hear that IR35 is on a contract by contract basis, and if having two contracts is no defence, then two seperate areas of business isn't either.

[zathras]

isn't reinvesting money within the business a definite pointer to being a proper business?

Of course if the money just sits there and does nothing then you probably won't have a leg to stand on

It may be a pointer but it is not an absolute pointer. You could have a caught contract even if the rest of the business is genuine. Ignore what is uttered by the government (you have heard the expression lies, damned lies and anything uttered by a New Labour Politician?).

Mind you what is suggested above is not the best way of dealing with it. You could for example pay some money into a pension. This is subtracted from the deemed salary calculation. Then of course is the entire money from a caught contract. Money paid for actual salary is also deducted from the deemed salary. Kinda handy if the amount from a caught contract is less than the salary you would pay - there is no deemed salary payment to make.