Is there any reason to ever declare being inside IR35?

[d000hg]

Even if you are sure a contract is inside IR35, is there any reason why you shouldn't act like it is not, and put the extra money aside in a long-term high-interest account?

If you get investigated and they rule a contract was IR35, what happens? Do they
a)just ask you for the unpaid tax
b)also add interest
c)add big penalties

[northernladuk]

Isn't this something along the lines of tax avoidance and ignorance of the rules is no defence.

Think about lying on your tax returns and implications of doing that. I think that will just about cover it I guess?

If you are going to do this you might as well fiddle your expenses, doctor your tax returns and incorrectly fill in you VAT and pray every night?

[VectraMan]

Isn't this something along the lines of tax avoidance and ignorance of the rules is no defence.

Tax avoidance is legal.

Do we know if the people who have lost end up having to pay huge penalties as well? My impression is that they just repay the outstanding tax, possibly plus interest. On that basis you'd be no worse off acting as if outside IR35, but putting the money into some kind of "high" interest account for 6 years, just in case you end up having to pay.

[expat]

Tax avoidance is legal.

I am afraid that is a quaintly old-fashioned notion. Avoiding tax that parliament intended you to pay is now a crime even if OK by the law at the time that you do it.

[northernladuk]

Tax avoidance is legal.

Do we know if the people who have lost end up having to pay huge penalties as well? My impression is that they just repay the outstanding tax, possibly plus interest. On that basis you'd be no worse off acting as if outside IR35, but putting the money into some kind of "high" interest account for 6 years, just in case you end up having to pay.

Ok wrong word. It would be tax evasion instead wouldn't it? Falsely declaring your situation to pay less tax? You get my meaning.

Is this true? I can't believe there will be no other penalties? Surely there has to be something to deter people doing this? Interesting.

It is most definately with interest. I had problems when I left my last permie role that meant I was late paying something and didn't take long to start the interest ticking.

[d000hg]

Isn't this something along the lines of tax avoidance and ignorance of the rules is no defence.

Think about lying on your tax returns and implications of doing that. I think that will just about cover it I guess?

If you are going to do this you might as well fiddle your expenses, doctor your tax returns and incorrectly fill in you VAT and pray every night?

If you don't declare yourself inside IR35 you are still accurately reporting all your accounts for the year. You're not making up giant £10k expenses to get the money out or anything devious. So I'd expect it to be viewed as a mistake, not lying... and I thought HMRC were generally forced to be helpful helping you pay them?

[northernladuk]

If you don't declare yourself inside IR35 you are still accurately reporting all your accounts for the year. You're not making up giant £10k expenses to get the money out or anything devious. So I'd expect it to be viewed as a mistake, not lying... and I thought HMRC were generally forced to be helpful helping you pay them?

Hmmm interesting.... but won't you be declaring your accounts based on a different set of cicumstances so are effectively gaining and advantage which is same thing. Also I don't believe a mistake to be any kind of defense. Might not come down on you like a ton of bricks granted, but it is a risky defense.

They are helpful to an extent but that won't mean you can get away with not paying what you owe. If you have withheld money or underpaid you wil owe the money plus interest. I expect they will allow you to split it over time somehow which they did in my case but that doesn't mean you don't have to pay the interest.

[d000hg]

If the only extra you pay is interest, then making the professional decision that all contracts are outside IR35 and putting the money aside to gain interest doesn't seem a bad approach. If that's how it works, then the worst case is they use a slightly higher interest rate than you saved at... best case you continue to always save all 'possible IR35 money' until you retire/emigrate/die. You absolutely never spend it, because you are holding it back in case.

[northernladuk]

I am loathed to get in to a complex discussion on this becuase to be honest I just don't know and don't want to look an idiot but...... being in or out of IR35 means you are taxed differently therefore you gain or lose depending on how you class yourself. Yes you declare you income the same but it is taxed differently surely??

This page might explain http://www.ir35calc.co.uk/financial_...ontractor.aspx

Outside IR35
Contractors outside IR35 typically use a limited company structure for their payments. They pay themselves a low salary with the rest paid in dividends.

This structure results in the following:

Employers N.I. of 12.8% avoided on all revenue.
Employees N.I. of 11% partially avoided, since upper bracket not reached.
Employees N.I. of 1% completely avoided on all revenue, since upper bracket not reached.
PAYE of 40% completely avoided, since higher rate tax bracket not reached.
Contractors caught by IR35 pay significantly more tax


Under this structure the contractor will also pay corporation tax of 22% on all profits, after expenditure.

Finally, the contractor pays further taxation on their dividends if their total personal income (salary + dividends) falls within the higher rate bracket. In this case the contractor pays an extra 25% on the amount falling within the higher rate bracket, due to tax credits on dividends.

Inside IR35
Contractors inside IR35 typically use a contractor umbrella company, since it is cheaper than the limited company structure which provides no real benefits when caught by IR35. If the contractor still uses a limited company the tax calculations are the same.

The ‘inside IR35’ structure results in the following:

Employers N.I. of 12.% applied to all gross earnings*.
Employees N.I. of 11% paid on all earnings within lower bracket.
Employees N.I. of 1% paid on all earnings within upper bracket.
PAYE of 40% paid on all earnings within higher rate tax bracket.
* Gross Earnings = (Revenue – Expenses) * (1/(1+employers NI rate))

In this scenario all taxes are fully paid. The only way to minimise tax is to take full advantage of any available expenses benefits.

Comparing actual figures for inside and outside IR35
Rate per hour Change in tax burden Take home pay per month
£20 Taxes increase 88% Decreases 24% (£503)
£30 Taxes increase 63% Decreases 23% (£711)
£40 Taxes increase 44% Decreases 22% (£863)
£50 Taxes increase 35% Decreases 21% (£1,015)

[northernladuk]

So you see you will be better off one way than you will the other so falsely claiming you are out when the working conditions are in means you are not paying as much tax as you should therefore you are breaking the law.

Now I guess you can all shout at me cause I cocked up somewhere