A question for/ref IR35 insurers

[TheMrs]

Will this invalidate my IR35 insurance? - We are a PSC and given the interpretative nature of IR35 legislation, we took out IR35 insurance at the outset despite being reasonably comfortable that our contracts AND WORKING PRACTICES would place us outside.

In our first year of trading we made a fundamental mistake in granting interim dividends without having first set aside the corporate tax notionally due at any point. This was in the context of having a secure contract, with a healthy notice period from the client, in a market with insatiable demand etc etc. Not a mistake we have repeated this year nevertheless.

The postition was fully rectified by the time our accounts were filed and showed a healthy profit. I appreciate that there is no reason for HMRC to look further, but if they did....

I have noticed in a previous post ref IR35 insurance that QDos, for example, will not honour cover in the event of "bad accounting". Does this count?

With thanks

[TheCyclingProgrammer]

Can't see why it would have any affect on your insurance as your mistake is unrelated to IR35.

Also, if everything was sorted by the time your accounts and return were filed and your tax was paid on time then u can't see why it would ever draw HMRCs attention.

[northernladuk]

Can't see why it would have any affect on your insurance as your mistake is unrelated to IR35.

Also, if everything was sorted by the time your accounts and return were filed and your tax was paid on time then u can't see why it would ever draw HMRCs attention.

+1 to this. Bad accounting in their terms probably means close to fraudulent. Mistakes happen so they can't hold you to that.

One mistake you are still making however is to think a healthy notice period is any use to you whatsoever.

[Jessica@WhiteFieldTax]

Conur. My experience of acting as intermediary on these policies is that exclusions are only exercised with reluctance and very rarely.

Most tax enquiry insurances won't cover either criminal investigation or COP8/COP9 civil investigation of major fraud. But an issue over dividend accounting isn't in that league...

In short, don't fret.

[Wanderer]

In our first year of trading we made a fundamental mistake in granting interim dividends without having first set aside the corporate tax notionally due at any point. This was in the context of having a secure contract, with a healthy notice period from the client, in a market with insatiable demand etc etc. Not a mistake we have repeated this year nevertheless.

The postition was fully rectified by the time our accounts were filed and showed a healthy profit.

So you were careless and took dividends ultra vires. These should have been accounted for as a director's loan and you would have to either pay interest on the loan (at the official rate, currently 4%) or account for the loan as a beneficial loan and pay tax on the BIK.

I really don't think this is going to be such a big deal, especially as if it was all squared up by the end of the company year. Remember than you can also pay a dividend on the day you issue an invoice, there is no strict requirement for you to have your money in the bank before you can pay out the dividend.

Probably the most that will happen is that you will have to pay BIK on the 4% interest due on the director's loan you took out. So a £20k loan over 6 months at 4% will add £400 to your taxable income for that year. This will probably cost you more in accountant's fees than tax and penalties...

[ASB]

There is no certainty the divis were nominally illegal.

consider. Bill 20k. No exes, profot 20k. Arguably a 20k divi is ok. The ct is not due yet, if there is genuine expectation of being able to pay the ct when it falls due then it is defendable.

[TheMrs]

Remember than you can also pay a dividend on the day you issue an invoice, there is no strict requirement for you to have your money in the bank before you can pay out the dividend.

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

[TheCyclingProgrammer]

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

As an addendum to Wanderer's point, if you declare a dividend before you have the cash, you should still ensure the dividend paperwork is drawn up correctly on the date you wish to declare the dividend (so minutes and vouchers) and in your books show a credit to the director's loan account.

This removes any ambiguity over the date the dividend is declared and considered paid (which might be important for tax planning purposes).

You are then free to draw the money down when it's available.

Normal caveats about having enough profit to cover the dividend in the first place (although I'm sure you're well aware of this by now).

[Wanderer]

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

I suppose I should give a reference to back up my statement then! See Can I base my dividend on invoices?. You may also want to make sure you and your account are familiar with HMRC's manual section CTM20095 which deals with dividends.

I'd be interested to hear how this all turns out - can you let us know when it's resolved and what happened. Most likely it's a minor thing where there some BIK is due on an undeclared director's loan.

[ASB]

Distributable Profits Guidance

leads to the icaew guidance.