Low Salary High Divvies

[Wanderer]

What exactly does "commercially realistic" mean?

It's not defined in tax law but my understanding of the definition is that it would be that the salary that someone with your skills would expect to do the work the company is engaged to do. So for a contractor LTD company with a £100k income, I would expect a commercially realistic salary would be about £50k.

I think that suggestions about "commercially realistic" salaries are FUD spreading. I mean, consider a contractor who could take £50k salary as a permie, turns over £100k as a contractor and draws a £20k salary. You could easily argue that's not a realistic salary unless the director was retaining all the profits to grow the business (rather than paying it out as dividends).

Is it illegal to pay an artificially low salary?

No. As a director you can pay whatever you like (including nothing) so we do.

Some accounts recommend a "minimum wage" salary (though a company director isn't legally bound to pay NMW) or a nice round £12k salary so you are at least paying some tax. Others say you might as well be hung for a sheep as a lamb and it's unlikely that making a "charitable donation" to HMRC will get you any concessions from HMRC.

Only HMRC know how they choose people for investigations but it's not rocket science just look at the answer to the "Service Companies" question on the self assessment and that's a good start....

[SteelyDan]

HMRC stated in their IR35 enquiry evidence that they are targetting this group, although an additional part of the criteria is low expenses.

Tradesmen usually have high expenses and are much less likely to have a Ltd. company.

The lower the salary and higher the dividend, the greater potential reward there is from an inveatigation. And the numbers are very easy to identify.

Sorry but I'm not getting this at all:

All of us who operate as directors of a limited co, will (I think):

• Take minimum salary (in line with permissible levels as advised by our accountant)
• Take dividends (to supplement the minimum salary)
• Have high turnovers (unless we are 'benched')
• Keep expenses to a minimum (as any business would in order to ensure we have enough profits to take dividends)

If this is true, then most of us on here are prime targets, are we not?

[Zero Liability]

My accountant has advised going with £641pm as an annualised lump sum, i.e. at the primary threshold.

[GB9]

Yeah, right.

About £1.1m last year from 256 cases opened, of which a third resulted in no tax being due. The rest were "resolved", meaning, presumably, that the contractor paid up without fighting over paying a tax they may well not actually owe..

That "decent return" - an average £6k per case closed - doesn't even cover the cost of the inspectors' wages

I totally agree with you. In terms of tax recovered IR35 investigations have been a complete disaster over the years. But if you were looking for a cohort of subjects to start work on, then the criteria detailed are about as a good a place to start.

[Zero Liability]

I totally agree with you. In terms of tax recovered IR35 investigations have been a complete disaster over the years. But if you were looking for a cohort of subjects to start work on, then the criteria detailed are about as a good a place to start.

There's a huge number of PSCs out there, though; their reviews don't even capture 0.1% of the population at their current peak (this is notwithstanding suggestions to ramp it up, but that will take time) - as such, would they focus on contractors with high turnovers?

[GB9]

Sorry but I'm not getting this at all:

All of us who operate as directors of a limited co, will (I think):

• Take minimum salary (in line with permissible levels as advised by our accountant)
• Take dividends (to supplement the minimum salary)
• Have high turnovers (unless we are 'benched')
• Keep expenses to a minimum (as any business would in order to ensure we have enough profits to take dividends)

If this is true, then most of us on here are prime targets, are we not?

Yes. And they will find people who should have paid more tax.

Personally I take a higher salary than I need to but that's personal choice / stupidity dependent upon who you listen to. There is nothing wrong with taking a minimum salary and paying the rest as dividends if outside IR35.

[Wanderer]

In terms of tax recovered IR35 investigations have been a complete disaster over the years.

You could also argue that IR35 has been a huge success at deterring people from incorporating as LTD companies so there has been a huge net gain to the exchequer....

[MPwannadecentincome]

A few people have mentioned turnovers here. What was mentioned at the Lords Committee was the RATIO of dividends vs salary as declared on the PSC question in the tax return.

[Zero Liability]

Yes but bearing in mind the number of PSCs, and the capacity for investigations they currently have (barely even 0.1% of the population, if the 200k figure is correct), would they not target cases which could net them higher returns? I mean in reality, if the salary is low, the higher the dividends, the higher the ratio of them to salary will be anyway.

[MPwannadecentincome]

Yes but bearing in mind the number of PSCs, and the capacity for investigations they currently have (barely even 0.1% of the population, if the 200k figure is correct), would they not target cases which could net them higher returns? I mean in reality, if the salary is low, the higher the dividends, the higher the ratio of them to salary will be anyway.

Exactly the point I think the Lords have taken away from the Committee witness statements