Two Questions on IR35

[Malcolm Buggeridge]

I can't sleep so I thought I'd pose a couple of questions that I've been mulling over recently.

1) Salary. I've come to the conclusion from chats with colleagues (though not with my accountant yet) that I should pay myself a reasonable salary and take the rest as dividends, rather than just paying myself the bare minimum salary. I've been persuaded to believe that this will help in not flagging myself for an investigation. Now, we can argue the toss over this but this isn't my question.

My question is this. Will suddenly paying myself a modest salary after just paying myself up to the threshold for so long red flag me in any way?

2) I've done a lot of contracts over the last few years. I was just wondering what happens, in the event of an investigation, when there's nobody around anymore at the client who remembers you and therefore can't give hmrc any details of your working practices? Bit hard for them to build a case when there's nobody there to provide the specifics surely?

[badger7579]

I can't sleep so I thought I'd pose a couple of questions that I've been mulling over recently.

1) Salary. I've come to the conclusion from chats with colleagues (though not with my accountant yet) that I should pay myself a reasonable salary and take the rest as dividends, rather than just paying myself the bare minimum salary. I've been persuaded to believe that this will help in not flagging myself for an investigation. Now, we can argue the toss over this but this isn't my question.

My question is this. Will suddenly paying myself a modest salary after just paying myself up to the threshold for so long red flag me in any way?

Why would it? it is up to you as to how the company director is compensated.

2) I've done a lot of contracts over the last few years. I was just wondering what happens, in the event of an investigation, when there's nobody around anymore at the client who remembers you and therefore can't give hmrc any details of your working practices? Bit hard for them to build a case when there's nobody there to provide the specifics surely?

Agreed.

[jamesbrown]

Agreed on the second point. I wouldn't worry about the salary. There's no evidence it's used by HMRC and it would be a pretty weak indicator. Anyway, if you're really going to pay yourself a "commercial" salary, it's all moot (i.e. is 15k versus 8k really the difference between commercial and not? Plus it makes commercial sense to not pay more tax than needed). In short, I don't buy the first argument and whether dramatically changing the salary would be a flag is just as arguable.

[Jessica@WhiteFieldTax]

Re 1 I honestly don't think it would make much difference with HMRC - their automated systems are not that sophisticated, and their staff are even less so.

Re 2 Its a sensible question, and AFAIR Accountax have used similar arguments successfully against HMRC.

[Wanderer]

My question is this. Will suddenly paying myself a modest salary after just paying myself up to the threshold for so long red flag me in any way?

I don't think so, but HMRC won't say what their criteria for investigating tax payers is so no one really knows. Lots of accountants suggest a salary of £12k/year but I don't really see the point. I mean, if your company bills you out at (say) £100k/year and you are taking (say) £20k salary then that's still not a market rate salary is it?

Also, as far as I am aware, no one has ever used the argument that they paid them selves a "modest salary" as a defence in an IR35 investigation. You might as well be hung for a sheep as a lamb in my opinion and the money you avoid paying to the tax man can be put into your IR35 fighting fund. But each to their own...

I was just wondering what happens, in the event of an investigation, when there's nobody around anymore at the client who remembers you and therefore can't give hmrc any details of your working practices? Bit hard for them to build a case when there's nobody there to provide the specifics surely?

I agree with that. And of course, when you get investigated you will be able to refer to your files where you saved all the examples of working practices showing that you were in business of your own account which will carry a lot more weight than vague recollections from the client company.

2) I've done a lot of contracts over the last few years.

And each contract will be considered individually on it's own merits so HMRC will have a right bitch of a job trawling through all of them as you argue the point over every detail, won't they.

HMRC aren't stupid. Most likely, they will put it into the "too difficult" pile and then go and pick on some nice juicy permietractor who has worked for the same client for the past 10 years.

From what you've said, you don't have anything to worry about. Stick to the minimum salary and dividends...