Client decides role is inside IR35 but then fails to deduct any taxes

[dingdong]

What would happen in the scenario where a client decided a role was inside IR35 but then failed to deduct any taxes when paying invoices to a contractor's company (no agency involved).


Would the client be liable for the taxes and penalties when HMRC come knocking?

Would the client have any legal right to try and force the contractors company to pay their tax bill at that point or refund any previous payments?



It really should't be the job of an IT contractor to tell the client's HR department how to do their job!

[hobnob]

If I do an inside IR35 contract via an umbrella, all the deductions (e.g. employer/employee NI) are done by the umbrella rather than the agency or the end client. If you're using your own limited company instead of an umbrella then it's your company's responsibility to make those deductions.

You will need to check your contract to clarify what the client is paying, i.e. the assignment rate vs the employee's gross pay.

(Edit: I was wrong, please see comments below.)

[eek]

If I do an inside IR35 contract via an umbrella, all the deductions (e.g. employer/employee NI) are done by the umbrella rather than the agency or the end client. If you're using your own limited company instead of an umbrella then it's your company's responsibility to make those deductions.

You will need to check your contract to clarify what the client is paying, i.e. the assignment rate vs the employee's gross pay.

Not Correct

It depends on whether the company is subject to the new IR35 rules (i.e. isn't a small company) but if they aren't a small company your company should be receiving Deemed payments with NI and income tax deducted from the payment made to your limited company. Your company will then receive after tax income and the full VAT amount.

It is the responsibility of the company that is paying your company (i.e. whoever has the contractual relationship with your company) to handle the tax payments.

[jamesbrown]

If you're using your own limited company instead of an umbrella then it's your company's responsibility to make those deductions.

As eek says, this is completely false in the situation where "new" IR35 applies (Chapter 10 of Part 2 of ITEPA, 2003).

To the OP, I think the situation is the same as any over-payment mistake (i.e., whether the over-payment reflects taxes that weren't deduced or fees overpaid or anything else). Assuming they've provided a timely SDS, with reasonable care, then the failure of the Fee Payer to deduct the correct taxes is a mistake and you should expect that they can fix that mistake by recovering the over-payment to YourCo.

[dingdong]

OK thanks. I clearly won't spend the money but will wait and see how long it takes them to come and ask me for it. They are so disorganised they might end up paying the tax bill themselves!

[northernladuk]

OK thanks. I clearly won't spend the money but will wait and see how long it takes them to come and ask me for it. They are so disorganised they might end up paying the tax bill themselves!

That wouldn't be my plan of action. I'd be contacting them to sort it out. What outcome are you expecting by keeping money that isn't yours? The client will be nice and friendly about it all when they come asking about it?

Would the client have any legal right to try and force the contractors company to pay their tax bill at that point or refund any previous payments?

You'd imagine they would seems you've kept money knowing full well it's not yours. Can't work out if that's theft or fraud? Either way... it's not yours so they will have plenty of rights.

Don't let greed ruin good business.

[hobnob]

Not Correct

As eek says, this is completely false in the situation where "new" IR35 applies (Chapter 10 of Part 2 of ITEPA, 2003).

Thanks both, and apologies for giving out incorrect information. Here's the ITEPA legislation that jamesbrown mentioned:
Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)
That specifically mentions public authorities, but presumably there's similar legislation for the private sector after this year's changes.

The most important part seems to be 61O(1)(b): "the worker has a material interest in the intermediary."
According to 51(4)(a) in chapter 8, that includes "beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 5% of the ordinary share capital of the company;"

I.e. that would be the case for your own limited company, but (probably) not for an umbrella.

[jamesbrown]

Thanks both, and apologies for giving out incorrect information. Here's the ITEPA legislation that jamesbrown mentioned:
Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)
That specifically mentions public authorities, but presumably there's similar legislation for the private sector after this year's changes.

The most important part seems to be 61O(1)(b): "the worker has a material interest in the intermediary."
According to 51(4)(a) in chapter 8, that includes "beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 5% of the ordinary share capital of the company;"

I.e. that would be the case for your own limited company, but (probably) not for an umbrella.

First, you're not accounting for all the changes made in recent FAs, as listed in the outstanding changes.

Second, if you're working through an umbrella, then it's all irrelevant - neither chapter 8 nor chapter 10 apply in substance because you are under PAYE employment.

Regardless, I don't think any of that is relevant to the hypothetical case described by the OP who is asking about whether they can retain an overpayment by the client and the answer to that is "no" but it has nothing to do with IR35, which remains the responsibility and liability of the supply chain above the OP's company.

[northernladuk]

Third time lucky Hobnob

[dingdong]

I'm not sure i'd necessarily agree that the money isn't rightfully mine given their incorrect inside rating.

Particularly given the email I've also just received asking if I can send my substitute again when i'm away on holiday next week. You couldn't make it up!


Anyhow I will now go explain the brave new world to their HR department again. Thanks all for your comments.