What happens if the revenue call about IR35 but there's no money in the business?

[LisaContractorUmbrella]

@cojak - he's been a contractor for over ten years, so he knows his stuff re IR35 clauses. The OP wasn't about whether her would be in IR35 or not. Like me (as well as many IT contractors) I imagine 99% of his contracts are 'borderline'.

What I'm really looking for is a way around IR35. Me personally, i'm a pro member of the PCG - plus i've taken out Qdos's TLC35 this week. But if there's another way round it, a loophole maybe, then i'm very interested in finding out more.

As for my friend's solution, i'm no tax expert (at all), but my gut instinct is that it won't work

@ASB - thanks, i'll have a look for those threads.

But are there any tax experts out there who would know for sure whether his solution of leaving no money in his business would foil the revenue if they come calling...?

Thanks again to everyone who's taking the time to respond

There are no 'ways round' IR35 and there are no loopholes - you will have to prove, to HMRC's satisfaction, that you are outside and if you can't do that you will have to cough up

[centurian]

Your friend is talking tulip. IR35 is based on the assesment of a personal tax.

Not quite correct. IR35 does not require you to pay yourself as PAYE at all, although many caught by IR35 do.

Instead, if IR35 applies, it requires a deemed payment charge be levied, which adds up to the same amount as if you had applied 95% IR35.

The distinction is important - because the deemed payment is a company debt, not unpaid Income Tax/NI by the individual.

Clare's warning is still valid, although I think it would depend upon the pattern of how divs were taken - challenging the legality of paid divs is not straightforward for HMRC.

[Clare@InTouch]

Not quite correct. IR35 does not require you to pay yourself as PAYE at all, although many caught by IR35 do.

Instead, if IR35 applies, it requires a deemed payment charge be levied, which adds up to the same amount as if you had applied 95% IR35.

The distinction is important - because the deemed payment is a company debt, not unpaid Income Tax/NI by the individual.

Clare's warning is still valid, although I think it would depend upon the pattern of how divs were taken - challenging the legality of paid divs is not straightforward for HMRC.

Agreed - IR35 is a company liability, that's why IR35 insurance is a valid business expense.

[LouC]

This seems to be quite an interesting issue.

As yet, no one has offered any reason why my friend's 'scheme' (for want of a better word) won't work.

If any IR35 payments are a company's debt, and there is no money in the company, then what would happen if there are IR35 debts to be paid and no money to pay them? As ASB said, it would be very difficult for the revenue to transfer this debt to another entity (company, or person) - so what would the revenue do in this situation?

Although it intuitively sounds wrong, is there any real basis for it not working?

[NotAllThere]

Perhaps he would be got under an artificial construct to avoid (a company owed) tax. As director, he could then be found to be personally liable for the company's debt.

[malvolio]

This seems to be quite an interesting issue.

As yet, no one has offered any reason why my friend's 'scheme' (for want of a better word) won't work.

If any IR35 payments are a company's debt, and there is no money in the company, then what would happen if there are IR35 debts to be paid and no money to pay them? As ASB said, it would be very difficult for the revenue to transfer this debt to another entity (company, or person) - so what would the revenue do in this situation?

Although it intuitively sounds wrong, is there any real basis for it not working?

Because he could be accused of trading insolvently by taking all the money out of the company and failing to cover a legitimate tax bill (OK, legtimate to HMRC, of course, but the courts will likley favour their viewpoint)? In which case they go after him personally with his diretor's hat on. DIrectors have legal duties with respect to their companies, being able to pay the bills is one of them. Taken to the extreme HMRC could easily bankrupt his invvestment company to recover the debt, since that represents a major part of his assets. We'll leave asiode the principle that HMRC can disregard any corporate structure or practice if it exists solely to avoid paying taxes and has no legitimate business purpose - like paying all its money to another company for no return.

Don't forget, you're only supposed to withdraw profits from the company, profits being decided after all liabilities are covered - not after all liabilities are paid off.

[jmo21]

This seems to be quite an interesting issue.

As yet, no one has offered any reason why my friend's 'scheme' (for want of a better word) won't work.

If any IR35 payments are a company's debt, and there is no money in the company, then what would happen if there are IR35 debts to be paid and no money to pay them? As ASB said, it would be very difficult for the revenue to transfer this debt to another entity (company, or person) - so what would the revenue do in this situation?

Although it intuitively sounds wrong, is there any real basis for it not working?

I'm wondering now if there is a friend.

They will come after "him" for the cash (specifically as Mal says above)

My point earlier was that if "he" thinks he knows a lot about IR35, yet thinks this scheme will work, "he" might be in for a surprise.

If "he" still doesn't believe everyone in this thread, carry on, the chances are pretty slim "he'll" get caught anyway, right?

[ASB]

This seems to be quite an interesting issue.

As yet, no one has offered any reason why my friend's 'scheme' (for want of a better word) won't work.

If any IR35 payments are a company's debt, and there is no money in the company, then what would happen if there are IR35 debts to be paid and no money to pay them? As ASB said, it would be very difficult for the revenue to transfer this debt to another entity (company, or person) - so what would the revenue do in this situation?

Although it intuitively sounds wrong, is there any real basis for it not working?

LouC,

I don't believe it would be impossible to transfer the debt. There is legislation in place to potentially allow it. It certainly wouldn't be a simple matter.

I forget the basis of THEPUMA argument as to why it could be difficult (and in the case of Employers NI possibly not even possible).

However there is the (potential) question of the legality of the dividends. Also in the event they were in breach of the companies act whether these could be reclaimed from the payees in order to settle the debt.

Under the companies act a shareholder can only be obliged to repay the dividend if they knew or had reasonable reason to believe the dividend was unlawful. This is based on knowledge at that time, not with a crystal ball.

If one had done reasonable due diligence, to show that one believed one was outside, then I think this would present quite a high barrier to either getting the dividends repaid or transferring the debt.

Certainly in the cases that HMRC has won and substantial liabilities have been imposed on somebodys company I have seen no details of how, indeed if, these liabilities were settled.

It is overly simplistic to say "they will just transfer the liability". Certainly there is a risk of it, but how high that is is very unclear to me.

[kingcook]

The distinction is important - because the deemed payment is a company debt, not unpaid Income Tax/NI by the individual.

Agreed - IR35 is a company liability, that's why IR35 insurance is a valid business expense.

If IR35 is a company liability, then why not close the company down if HMRC want any monies?

I always understood IR35 to be a personal debt/liability.

[eazy]

HMRC Personal Liability Notices [PLN's]

Contracting and Personal Liability Notices (PLNs) from HMRC<snip>

Contractors may be vulnerable to PLNs because of IR35Contractors found to be inside IR35 and facing a claim against their company for unpaid income tax, NICs, interest and penalties could have the balance of the NICs claim transferred to them personally if HMRC considers the contractor to have been negligent in determining their IR35 status.

Worryingly for contractors, the definition of neglect used by HMRC to determine whether a PLN should be issued is based on case law. And the case law definition of neglect is sufficiently broad and vague that even simple mistakes, or mistakes that arose through a lack of knowledge, could qualify as ‘neglect’

Over the last few years, it is no longer sufficient to believe that IR35 does not apply. Reasoanble steps need to taken to confirm (Independent IR35 contract reviews) to avoid penalties of 30%.