IR35 and corporation tax

[rocsen]

What happens to past paid corporation tax if someone gets caught by IR35? Would this get deducted from the additional NI/PAYE thats due? If they decide a company falls inside IR35, surely the paid corporation should be refunded, as this doesn't apply anymore?

Also, how much interest do they charge on additional NI/PAYE?

Many thanks

[expat]

What happens to past paid corporation tax if someone gets caught by IR35? Would this get deducted from the additional NI/PAYE thats due? If they decide a company falls inside IR35, surely the paid corporation should be refunded, as this doesn't apply anymore?

Also, how much interest do they charge on additional NI/PAYE?

Many thanks

Why doesn't it apply anymore? IR35 relates to personal income tax and NICs. If a company passes its year-end with profit in the bank, CT is due. If that money is then paid out as dividends but those are re-assessed as being due NICs, so be it: that doesn't affect the CT.

HMRC are aware that this may result in more tax being paid than might have been necessary, and they suggest that you structure your and the company's affairs so that this situation does not arise. Right.

[centurian]

I think that this is taken into account. You don't end up paying the tax twice.

Remember you can still pay yourself dividends if inside IR35 - you just have to make a "deemed payment" as well to bring it up to what it would have been had to you 95% PAYE, so if you are caught, you might just as well go 95% PAYE in the first place

So I think they charge you the deemed payment value if they determine you are within IR35

However, you could have to pay interest and penalties on this amount, which could easily mean you end up paying double what you would have had to pay in the first place.

All IMHO though..

[PhilAtBFCA]

rocsen

If you mean that you have been doing your accounts outside ir35 and then are deceided to be inside ir35 after an HMRC invesitgation then the situation would be that the accounts for the period in question would need to be restated, any CT paid may have to be credited back to the company due to the lower profits of the deemed payment being accounted for.

On the unpaid NI and PAYE tax and penalties if appropriate would be charged, with the interest prevailing at the rates applicable for the period.

centurian

Yes you dont end up paying tax twice. The Dividend distribution is reduced by the Deemed Payment according to the provisions in the legislation, but its not a very effective way of running your company inside IR35.

Phil

[expat]

rocsen

If you mean that you have been doing your accounts outside ir35 and then are deceided to be inside ir35 after an HMRC invesitgation then the situation would be that the accounts for the period in question would need to be restated, any CT paid may have to be credited back to the company due to the lower profits of the deemed payment being accounted for.

On the unpaid NI and PAYE tax and penalties if appropriate would be charged, with the interest prevailing at the rates applicable for the period.

centurian

Yes you dont end up paying tax twice. The Dividend distribution is reduced by the Deemed Payment according to the provisions in the legislation, but its not a very effective way of running your company inside IR35.

Phil

Is it true that the deemed payment reduces the profit? I thought the deemed payment was deemed only for the purposes of income tax and NIC liability?

I also remember reading on the HMRC site that they admitted that some legitimate actions crossing the Co year-end would lead to being taxed twice, and they could only suggest not doing that? Sorry, can't find link any more.

[PhilAtBFCA]

expat

The Deemed Payment is there to show what PAYe and NICs should be charged on the earnings, but these are a debt owed by the company which has the obligation of paying them.

therefore they should be shown in the accounts of the company, this is best achieved by running it as salary.

the employers NI on the deemed payment is also a cost to the company and should be shown in the accounts.

the profit is therefore reduced, and the CT theron

One way that you could look at it is that the Deemed Payment could be zero when its calculated if the worker had a salary that was large enough, or caluclated to be large enough to cover the DP. See this link for more details as in my view this is the eassieast way to be compliant within IR35 contracts and still manage a Ltd Co.

Phil

[expat]

expat

The Deemed Payment is there to show what PAYe and NICs should be charged on the earnings, but these are a debt owed by the company which has the obligation of paying them.

therefore they should be shown in the accounts of the company, this is best achieved by running it as salary.

the employers NI on the deemed payment is also a cost to the company and should be shown in the accounts.

the profit is therefore reduced, and the CT theron

One way that you could look at it is that the Deemed Payment could be zero when its calculated if the worker had a salary that was large enough, or caluclated to be large enough to cover the DP. See this link for more details as in my view this is the eassieast way to be compliant within IR35 contracts and still manage a Ltd Co.

Phil

Thenks.

I understand that the actual amounts due to HMRC (tx and NICs on deemed payment) are costs to the company.

I also understand that the deemed payment would have been zero if the required amount had been paid as salary. But it wasn't. It wasn't a debt owed by the company because the company had not agreed to pay that salary, it had specifically planned not to (but instead to retain profit). Can you really retrospectively classify last year's profit as last year's salary?

[centurian]

Thenks.

I understand that the actual amounts due to HMRC (tx and NICs on deemed payment) are costs to the company.

I also understand that the deemed payment would have been zero if the required amount had been paid as salary. But it wasn't. It wasn't a debt owed by the company because the company had not agreed to pay that salary, it had specifically planned not to (but instead to retain profit). Can you really retrospectively classify last year's profit as last year's salary?

PhilAtBFCA seems to be the expert here, but I'll dive in with my understanding.

Any additional deemed payment is a company cost - not an employee payment.

But being inside IR35 doesn't force you to use PAYE - it merely applies an additional cost to the Ltd company, which means you end up paying the same or more - so it's eaiser just to go through PAYE.

So you're not retrospectively converting profits to salary - you're just applying an additional company cost to HMRC.

[expat]

PhilAtBFCA seems to be the expert here, but I'll dive in with my understanding.

Any additional deemed payment is a company cost - not an employee payment.

But being inside IR35 doesn't force you to use PAYE - it merely applies an additional cost to the Ltd company, which means you end up paying the same or more - so it's eaiser just to go through PAYE.

So you're not retrospectively converting profits to salary - you're just applying an additional company cost to HMRC.

AIUI the deemed payment itself can not be said to be a cost, whether to the company or to the individual. The tax and NIC on it is a cost.

If the actual salary paid is less than the deemed payment (less 5%) then extra tax and NIC is due on the difference. This extra tax and NIC is of course a cost, although ISTM that it would come out of the deemed payment, and therefore be effectively a cost to the individual.

But more than that, it is not the whole deemed payment (nor even the excess deemed payment over salary) that becomes a cost and therefore reduces profits; it would be only the tax & NIC due that would be a cost.

Example: your Co pays you a salary of £50,000, and keeps £50,000 in the Co. Pay CT, let me say at a rate of 20% for simplicity: CT = £10,000. Pay dividends £40,000. Grossed up to notional £44,444. Therefore dividend tax (assuming HRT) of 22.5%, = £10,000.

Now Hector says that your deemed payment was £100k, not the plain salary of £50k. You are short tax and NICs on £50k. You (yes you, not the Co) have only paid £10k tax on that. You need to pay another £10k, from your own money, or to be precise from that deemed £50k. On top of that, the Co needs to pay ERs and EEs on the £50k. That means £500 (1%) EEs from you, and £6,400 (12.8%) ERs from the company.

The comany can of course reduce its profit by that £6,400 - but not by the £50k that it treated as profit.

Am I off track here?

[PhilAtBFCA]

Can you really retrospectively classify last year's profit as last year's salary?

expat

You are not reclassifying last years profits as salary really.

What you could do is restate the accounts to reduce the profits by the costs of the gross deemed payment and employers ni. the practical applicationof this would depend on the year end date(s) affected.

The dividend payments received would need to be restated as payments to the worker, in advance of the net deemed payment. It is possible after this is accounted for that the director owes money to the company, i.e. has had too much from the company !

The tax, ers, and ees would be owed by the company to HMRC as it is the company that, under the legislation, should have deducted ees, tax and paid over the ers and calculated the deemed payment. The ees and tax is not owed by the worker as this is a calculation under PAYE ( therfore the liability of the company not the individual)

There is a provision in the legislation that for the workers personal tax purposes reduces the dividend paid by the gross deemed payment, which is actually irrelevant if your restate the accounts.

AIUI the deemed payment itself can not be said to be a cost, whether to the company or to the individual. The tax and NIC on it is a cost.

The point is that the Gross Deemed payment on which Employers NI is charged is deductible in the accounts of the company and reduces its corporation tax bill, and the tax and employees NI is owed to HMRC by the company, and is therefore accounted for in the company accounts.

Here is a reworked example:-

before the DP calculation company looks like this:-


Contract Income £100,000
Salary £50,000 ( on which lets say £14,459.60 paid in EES and tax)
ERS £5667.84
Profit before tax£44,332.16
CT £9309.75
Dividends(net) £35,022.40 ( gross £38913.77)
Retained balance £0

So your gross earnings are:-
£50,000+£38913.77 = £88,913.77
On this earnings tax paid by the company was
ERS £5667.84+CT£9309.75+£14459.60 tax and ee = £29,437.19 and you will owe £8755.60 in Higher Rate Tax
You received net
£35540.40 salary and £35022.40 dividends = £70562.80 less £8755.60 Higher rate Tax = £61,807.20 ( 62 % net income)

Note: If you had used a salary of £5720 instead your net would have been in the region of 71%.


You now have to calculate an inside IR35 scenario

Contract Income £100

ERS on DP £10,131.06
Deemed Payment Gross £84868.94 ( £100 less 5% less £10,131.06 ERS and £28485.86 paid in EES and tax )
Profit before tax £5000
CT £1050
Dividend net £3950 gross £4388
Retained Profits £0

So your Gross Earning are
£84868.94+£4388 = £89256.94
On these earnings tax paid by the company was
ERS £10131.06+ CT £1050 + £28485.86 = £39666.92 and £987.50 owed in higher rate tax
You received net
Net Deemed Payment £56383.08 and dividend £3950 = £60333.08 less higher rate tax of £987.50 = £59345.58 ( 59% net )


So lets say that you had done your accounts on the Outside Ir35 example above and then realised you neede to do a deemed Payment calculation.

You can see that you would have received £70562.80 outside IR35 whereas inside IR35 once the accounts were restated you should have only received £60,333.08 and you would therefore owe the company £10,229.72

(this would appear as a directors loan account and may cause the trigger of Section 419 tax of 25% of the loan and possibly benefit in kind charges, it would depend on the year end date of the company, but lets try to steer clear of that one !)

Your personal tax bill would have reduced from £8755.60 in the outside IR35 example to £987.50 in the inside IR35 example. This would need to be adjusted by way of an SATR or a restatement of the SATR if it had already been filed using provision in the IR35 legislation.

The company under the outside IR35 calculation would have owed £9309.75 in CT and £20127.44 in PAYE including tax, ERS and EES.

After restating the accounts it now finds it owes £1050 and £38616.92 in PAYE including tax,ers and ees.

The company would reclaim the CT of £8259.75, (or apply to have this amount credited to the paye account), after that the company would owe a further £10229.73 in paye including tax,ers and ees.

The company at this point would need to ask the director for the £10,229.72 he was overpaid in the first place.

1p would be written off somewhere as an extra cost to the company !

Hopefully that helps ! ( this is an example , but the figures are skewed by 1) large salary in the outside ir35 example , and 2) no expenses )

Phil