Employer's NI liability when IR35 Caught

[palatino winotype]

I'm reasonably confident that I am not caught by IR35.

That said, I always keep a fair wedge in the company account, just in case.

I was thinking though - if I got investigated and lost, I would be personally liable for the PAYE and employee's NI.

They would also want the employer's NI too but I can't possibly see how I, as an individual, can be held liable for it.

Would I be personally liable for employer's NI or would my company be liable?

[Kanye]

My understanding is that you would be liable.

If you fail the test then you have to make HMRC good as though it was an employment situation.

That would include everything owed with regards to company national insurance, and everything owned with regards to personal national insurance and taxes.

This would be the case even if the company was owned by someone else. If the employee is found to be inside then I assume they would chase the employer.

I wonder if they would pursue you twice though - once personally and once as the company director.

Employers NI is annoying. I have looked at the figures and would go under a brolly company but the fact that the employers NI costs are passed backed to the contractor makes it not viable.

[IR35 Avoider]

I don't think there is any realistic scenario in which you would personally be held personally liable for employer's NI. Presumably this is only an issue where the company is unable to be held liable, because it has no current assets of future earnings to pay the bill, probably because it has been wound up.

I have for a while had a suspicion that it might be a prudent risk reduction measure to start a new company for each contract (or maybe once a year, if you switch contracts more often than that.) Where IR35 is applied retrospectively there is a possibility of being taxed more than if one had treated oneself as caught at the time, so I can't see anything wrong with openly admitting IR35-risk as a reason for not combining different contract's/year's earnings into the same company. (Though if there's no positive reason to say that I obviously would say nothing.)

(I don't regard my self as not-caught, so I haven't really looked into this properly.)

Each time you wind up a company that creates a potential trigger point for an investigation, so you need to take that (slight) risk into account.

I think there was a very recent article (in contractoruk newsletter?) where an accountant discussed the merits of changing company often. I don't remember the details, but at the time I felt it confirmed my views. (I was unable to find it during a 30-second search, hopefully someone else will post a link.)

I do think that retaining funds increases your risk of being a target for investigations of any kind.

[palatino winotype]

My understanding is that you would be liable.

But how? I'm a disguised employee. I can see how the company would be liable but not me as an individual.

Sounds like HMRC are having their cake and eating it.

[Kanye]

I don't think there is any realistic scenario in which you would personally be held personally liable for employer's NI. Presumably this is only an issue where the company is unable to be held liable, because it has no current assets of future earnings to pay the bill, probably because it has been wound up.

Though not personally liable I think your company would become liable as an outcome of the investigation. If you have the retained funds I think you would have to pay it.

I have for a while had a suspicion that it might be a prudent risk reduction measure to start a new company for each contract (or maybe once a year, if you switch contracts more often than that.)

The problem with this is that you have to withdraw all of your earnings at a faster rate than you would otherwise. I'm almost better to take the IR35 risk than withdraw 100k+ a year from the company just to close it down.

[Kanye]

But how? I'm a disguised employee. I can see how the company would be liable but not me as an individual.

Sounds like HMRC are having their cake and eating it.

Yes, loose language on my part, sorry.

YourCo would be liable and if you have the retained funds you would have to pay it out of the same investigation.

[Note I'm not an expert on this but have looked at IR35 implications carefully so just my opinion.]

[IR35 Avoider]

But how? I'm a disguised employee. I can see how the company would be liable but not me as an individual.

Sounds like HMRC are having their cake and eating it.

It definitely is very difficult to transfer liability to you, I think they would have to do something like prove negligence/fraud as a director, which given intrinsic uncertainty of IR35 would be be virtually impossible. The article I mentioned definitely agreed with me on this point.

Many years ago I studied IR35-avoidance schemes, so did have reason to study the circumstances in which PAYE obligations could be transferred to employee.

The good news was that where one was not a director of the tax-avoidance vehicle, it was not even clear-cut that employee tax and NI could be transferred, even though employees are nominally liable for those. (Although not clear-cut, in practise they probably could be transferred though.)

In your case, you would be liable for those, as the failure to deduct the right amount would be an error made in good faith by the company, and in those circumstances HMRC can collect from the individual.

The reason it is not a slam-dunk that employee tax and NI can be collected from an individual is that there are specific provisions to protect employees from employers who deliberately do not make correct payments. This scenario does not help contractors who are directors though.

[Ignis Fatuus]

But how? I'm a disguised employee. I can see how the company would be liable but not me as an individual.

Sounds like HMRC are having their cake and eating it.

They are not saying what you are, only what you will be treated as for tax purposes. Hence for example taxed as employee without any employee benefits.

I.e. yes they are eating their cake and having it. And their answer to that is that if you just accepted the status of employee in the first place then everything would be all right.

[IR35 Avoider]

The problem with this is that you have to withdraw all of your earnings at a faster rate than you would otherwise. I'm almost better to take the IR35 risk than withdraw 100k+ a year from the company just to close it down.

I can't speak with certainty as to what I would do, as I don't treat myself as not-caught, but I suspect it would be something like

1. 7K salary
2. 3K childcare
3. dividends up to higher-rate threshold
4. pension for the rest.

No funds in the company to pay any backlog of employers NI. Pension amounts intrinsically IR35-proof.

(Edit: the attraction of this strategy is obviously age-dependent. Makes more sense for a 45-year-old than a 25-year-old.)

[IR35 Avoider]

Hence for example taxed as employee without any employee benefits.

An employee is not liable for employer's NI. There are no specific provisions in IR35 that override this.

IR35 creates a deemed payment, an amount on which tax is due as if there were salary of that amount. With regard to the deemed payment, the position is exactly the same as for any employee working for a company that they do not own. Income tax and employee NI is due from the individual, and employer's NI is due from the company. The company has a responsibility in the first instance to deduct all three. If it fails to, only the first two can be recovered from the individual-as-employee.

In the contractor case, although a theoretical possibility exists to go after the individual-as-director for the employer's NI, in practice this route isn't really open.