IR35 Help!

[Kitmac]

Hi, I am trying to get my head aroung the repurcussions of an IR35 investigation. I have my own LTD Company of which I am an employee and I also have an employee who carries out all my secretarial and marketing work. From the income (excluding vat) that I generate to the LTD Company, I take a salary of about 43% of the total revenue generated. My other employee is paid about 19.5%. PAYE and Employer and Employee NI are applied to these. The expenses to run the company amount to about 9.5% leaving a balance in the company of about 28% of which corporation tax is applied and a dividend is taken. If it was deemed that the revenue I had generated into the company was within the IR35 guidelines, what is taken into consideration? The internet is a minefield trying to get a straight forward answer to this! Would my other employee be taken into consideration as a deduction or would the whole amount of revenue I had generated be liable to myself alone for tax and national insurance contributions? Any help to make me understand this a bit better would be gratefully received!

[SteelyDan]

The internet is a minefield trying to get a straight forward answer to this!

Sorry in advance, but what does your accountant advise?

[Clare@InTouch]

Usually it's quite simple and it's a case of taking the cash received (not invoiced, but actually paid in the year) less pension contributions, motor and travel, expenses or assets purchased that would be allowed if you were an employee and a flat 5%. That's then the gross salary plus Employer's NI that you need to have.

A second employee's salary is not an allowable deduction - that is part of the 5% flat allowable deduction you get for running costs of the company. Unless they are a fee earner of course, but then the income they generate wouldn't be part of the IR35 deemed salary calculation for you.

There's a good HMRC guide here: http://www.hmrc.gov.uk/leaflets/calc_deempyt.htm

"Step 3: However, where the company or partnership employs a spouse to carry out administrative work for the company, it is unlikely that his or her wages will be allowed when working out the deemed payment. This is because an employee would not have been allowed to deduct those wages when working out his or her taxable earnings from employment."

[VectraMan]

So assuming you carry on paying the employee the same, you'll be running at a loss as far as the CT calculation goes because you'll have spent more than the 5%. Is that right? And can you reclaim it / offset it against future profits?

[eek]

Assuming you are not under investigation purchase the IR35 insurance from either PCG Plus or the QDOS option...

[Kitmac]

Thanks everyone, especially Clare for your great explanation I think I am starting to see the lightbulb start to flicker above my head with this!

[Clare@InTouch]

So assuming you carry on paying the employee the same, you'll be running at a loss as far as the CT calculation goes because you'll have spent more than the 5%. Is that right? And can you reclaim it / offset it against future profits?

You can offset a loss against future profits, assuming you have a future contract that's outside of IR35 that allows you to generate a profit.

[VectraMan]

You can offset a loss against future profits, assuming you have a future contract that's outside of IR35 that allows you to generate a profit.

Which must represent a bit of a flaw in IR35: if you can reduce a future CT payment then in effect, you're not paying the full tax on the 95% that IR35 demands. It also means you're personally paying tax on money you've never earned. And that's beyond insanity.

[Clare@InTouch]

Which must represent a bit of a flaw in IR35: if you can reduce a future CT payment then in effect, you're not paying the full tax on the 95% that IR35 demands. It also means you're personally paying tax on money you've never earned. And that's beyond insanity.

Not at all, because you're still paying full PAYE on 95% of your income as per the IR35 rules. The fact that you're using the 5% to pay another salary is fine, and if you're making a loss that presumably means you're using your own funds or a loan to be able to pay enough salary or other expenses to generate a loss at all. The loss that you're carrying forward is the other expenses & other persons salary, not yours.

[BlasterBates]

HMRC are after one man businesses with no other employees who pay themselves the minimum wage. IR35 risk for someone like you with a real employee and earning a reasonable salary is very low in my view.

I wouldn't worry about it.