IR35 and tax liability on money kept in the company?

[northernladuk]

If this happens can HMRC only go for money left in the company account or can they go after the directors personal assets?

It is money paid to you as divi that should now be classed as PAYE so it is money already in your pocket. The LTD's accounts will be different due to CT changes and will be a bit messy for us none accountants but much of it will be personal tax changes.

Am sure one of our friendly accountants will give a much more concise answer though....

[Coolshot]

It is money paid to you as divi that should now be classed as PAYE so it is money already in your pocket. The LTD's accounts will be different due to CT changes and will be a bit messy for us none accountants but much of it will be personal tax changes.

Am sure one of our friendly accountants will give a much more concise answer though....

I was interested in this as on a couple of the published IR35 cases where the contract was found to be inside there aren't details on how the money HMRC was owed was paid back. For obvious reasons of confidentiality of course.

[Nathan SJD Accountancy]

It is money paid to you as divi that should now be classed as PAYE so it is money already in your pocket. The LTD's accounts will be different due to CT changes and will be a bit messy for us none accountants but much of it will be personal tax changes.

Am sure one of our friendly accountants will give a much more concise answer though....

If this happens can HMRC only go for money left in the company account or can they go after the directors personal assets?

Hi,

If you were trading outside of IR35, and it was then seen at a later date that you were inside of IR35. HMRC would seek to recover the tax that they should have received.

If you paid or did not pay the majority of the company profits to yourself as a dividend, you personally would be liable to HMRC, because the dividend income or 'deemed income' is then treated as employment income (taxed at different rates). This would result in an underpayment to HMRC.

HMRC would then seek to recover the Employers National Insurance from your company, the PAYE tax from you as it is your personal tax that has been underpaid.

As for the Directors personal assets, it would possibly be far into the future before they go down that road. A payment plan with interest and penalties would occur much earlier before then I would expect.

[Coolshot]

Hi,

If you were trading outside of IR35, and it was then seen at a later date that you were inside of IR35. HMRC would seek to recover the tax that they should have received.

If you paid or did not pay the majority of the company profits to yourself as a dividend, you personally would be liable to HMRC, because the dividend income or 'deemed income' is then treated as employment income (taxed at different rates). This would result in an underpayment to HMRC.

HMRC would then seek to recover the Employers National Insurance from your company, the PAYE tax from you as it is your personal tax that has been underpaid.

As for the Directors personal assets, it would possibly be far into the future before they go down that road. A payment plan with interest and penalties would occur much earlier before then I would expect.

Interesting. If the company didn't have sufficient funds to pay the Employers NI would they give up at this point?

[Nathan SJD Accountancy]

Interesting. If the company didn't have sufficient funds to pay the Employers NI would they give up at this point?

Unfortunately, I don't believe it is as simple as 'does the company have the funds to pay?' they would possibly look to establish the reasons why. Well I would if I were them anyway.

Assuming the company has 1 shareholder, 1 Director and the company is unable to pay. Then surely questions have to be asked such as:

Why can't the company pay?
Has the director spent all the money?
Were they acting irresponsibly?
Should they be liable personally?
Were they acting in the best interests of the company?

Answers to these questions could lead to the 'limited liability' title from owning a company being removed. Then those who made the decision of that company e.g. The Directors could be liable.

Of course I am specualting on numerous matters, but it has been proved that Directors can be held liable for company debts. I am not referring specifically to contractors, but Directors of companies in general.

Directors have numerous duties when appointed, one of which is to act in the best interest of the company at all times. Put it this way, if the company has a large NIC bill, and a massive Directors loan, and it owed you money, wouldn't you want the Directors to be liable?

[mickael28]

Sorry guys, not sure if my comment is being moderated as I've been trying to participate for a few hours now.

Thank you. I was thinking along the lines of:

* A contractor is working outside the IR35, in theory. Let's say he gets £80k/per year
* He pays himself £10k as salary and £30k as dividends, keeping £40k in the company.
* He pays PAYE/NI on the £10k salary.

If in the future he gets investigated and caught inside the IR35 rules, I understand (but I'm not sure) that then he should pay PAYE/NI on the £30k money he took as dividends, but what about the £40k that are still in the company? Can you still leave them there (like for a pension in the future) or does HMRC force you to take everything out and pay PAYE/NI on that amount as well?

[Bumfluff]

Sorry guys, not sure if my comment is being moderated as I've been trying to participate for a few hours now.

Thank you. I was thinking along the lines of:

* A contractor is working outside the IR35, in theory. Let's say he gets £80k/per year
* He pays himself £10k as salary and £30k as dividends, keeping £40k in the company.
* He pays PAYE/NI on the £10k salary.

If in the future he gets investigated and caught inside the IR35 rules, I understand (but I'm not sure) that then he should pay PAYE/NI on the £30k money he took as dividends, but what about the £40k that are still in the company? Can you still leave them there (like for a pension in the future) or does HMRC force you to take everything out and pay PAYE/NI on that amount as well?

I think they will force you to take out everything PAYE, if you fail IR35 you are supposed to pay all the tax and NI on all the turnover you had during that personal tax year, so you need to have paid it by the 22nd April of that year. I assume if you are investigated and fail the interest will kick in from the 22nd April of the tax year the full tax and NI was due.

Apperently you can't use a CTD (Cerfiticate of tax deposit) either as a hedge against being investigated and to reduce some of the interest charges as a CTD cannot be used against a PAYE libility, any of the accountants on here like to confirm this ?

[northernladuk]

Sorry guys, not sure if my comment is being moderated as I've been trying to participate for a few hours now.

Thank you. I was thinking along the lines of:

* A contractor is working outside the IR35, in theory. Let's say he gets £80k/per year
* He pays himself £10k as salary and £30k as dividends, keeping £40k in the company.
* He pays PAYE/NI on the £10k salary.

If in the future he gets investigated and caught inside the IR35 rules, I understand (but I'm not sure) that then he should pay PAYE/NI on the £30k money he took as dividends, but what about the £40k that are still in the company? Can you still leave them there (like for a pension in the future) or does HMRC force you to take everything out and pay PAYE/NI on that amount as well?

HMRC can't force you to take it out directly. It is business cash, when it comes out it is personal cash. You may have to do some creative accounting to make ends meet but they cannot force you to personally take cash out that belongs to the company. If you need to take it out to cover your personal liabilities that could be done and factored in to the bigger picture. The reality will be pretty complex so hard to say in such a hypothetical question.

[Nathan SJD Accountancy]

Sorry guys, not sure if my comment is being moderated as I've been trying to participate for a few hours now.

Thank you. I was thinking along the lines of:

* A contractor is working outside the IR35, in theory. Let's say he gets £80k/per year
* He pays himself £10k as salary and £30k as dividends, keeping £40k in the company.
* He pays PAYE/NI on the £10k salary.

If in the future he gets investigated and caught inside the IR35 rules, I understand (but I'm not sure) that then he should pay PAYE/NI on the £30k money he took as dividends, but what about the £40k that are still in the company? Can you still leave them there (like for a pension in the future) or does HMRC force you to take everything out and pay PAYE/NI on that amount as well?

Ooo. I understand the question fully now.

Unfortunately, it would be the £80K turnover less 5%, less travel, less pension, less insurance = X

The sum of the above (X) would be the amount that will be declared to HMRC and treated as a salary. Dividends would be ignored unless there was a small profit left over after the above (usually quite small).

So in answer to your question, the amount left in the account would be taxed, because the IR35 calculation (that I stated above) would have a very high tax liability with NIC too.

If money was left in the account, it would be quite small, and the event it was large and tax was up to date. It is probably your salary that you are owed. HMRC cannot force you to take it. Its yours

[northernladuk]

Just to add some reading material to this you could read up on the JLJvHMRC case where John Spencer got charged a £141K personal liability after 7 years of his work was initially judged to be inside IR35. He appealed and they he got a split decision saying some of his time was outside and then his circumstances lead him to become inside for the remainder of the contract. I can't find any more details on what that liability was reduced to unfortuantely, or what the impact on the company was so doesn't actually answer any of the questions on what monies will be involved.

Interesting read but don't get overly worried about it...

IT contractor JLJ in first ever 'split IR35 case' :: Contractor UK

Loads of resources if you search JLJ v HMRC

EDIT : Court summary here
http://www.bailii.org/uk/cases/UKFTT...1/TC01603.html