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Previously on "Newbie to Ltd contracting - if you have salary at under £12k you are more likely to.."

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  • Wanderer
    replied
    Originally posted by boulderman View Post
    An accountant mentioned £12-13k reduces your noticability and my friend has his accountant opt for £16-20k salary as the tax on the extra isn't "major" (he's been on £450 a day for a decade so he can afford it).
    £12k salary on a £100k profit isn't going to be a commercial salary by any means. In my opinion, you should go for the minimum salary that you can legally pay and then put the tax saved into your IR35 fighting fund.

    Leave a comment:


  • Gordon Ice
    replied
    Originally posted by boulderman View Post
    ..be investigated...as it is this type of company that is trying to beat IR35.

    As many (from research on here) opt for minimum way or maybe the optimum £10,000 (for maximum tax savings) this could be a backward approach due to the risk of IR35 costs.

    An accountant mentioned £12-13k reduces your noticability and my friend has his accountant opt for £16-20k salary as the tax on the extra isn't "major" (he's been on £450 a day for a decade so he can afford it).

    My question is:

    Is £12,000 optimum in terms of low tax (20% on the £2,000 [above the £10,000 tax free threshold])
    and low risk from IR35 (my contract is via an agency who said I wouldn't be at risk going via them).

    Quarterly dividends apparently draw the least attention from the tax man too.
    My plan was going to be:

    £12,000 Annual Salary
    ~£7,905 Expenses (extra rent @£5pd, food @£10pd, 10,000 miles) Assuming 227 working days a year

    Of reminder of my rate, *.8 to leave corporation tax and then pay the remainder of what is left quarterly to me (however I've heard you should leave say 30% in the business bank account so was going to do this?)

    Thanks for any help on any points.
    Simple rule - don't believe anything any agent tells you, ever..

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  • ASB
    replied
    Originally posted by BlasterBates View Post
    But how do they derive the number of dividends and the number of shareholders in order to garner that information ?

    The number of dividends is not submitted anywhere. It could be obtained from an individuals SATR is they happen to use the helpsheet and they happen to submit the helpsheet and they happen to put the divis individually on the helpsheet.

    The number of shareholder is the same, but could be requested from companies house.

    Leave a comment:


  • Clare@InTouch
    replied
    Originally posted by BlasterBates View Post
    The information is being taken from the Service Company box on the tax return though, so I can't see how it narrows down their investigation field by that much. A "service company" would be an accountant, an engineer, a carpenter, a builder, a developer, a plumber, a mechanic.....

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  • BlasterBates
    replied
    Found this intersting link:

    Is there a link between dividend levels and IR35 investigations?

    Jason Piper, of the Association of Chartered Certified Accountants thinks so, and recently told the House of Lords’ Personal Service Companies Committee, that he was “independently aware” that HMRC is monitoring PSCs’ dividend levels. It then carries out an IR35 risk assessment by dividing the number of dividends by the number of shareholders.

    Leave a comment:


  • Zero Liability
    replied
    I've asked the Qdos representative on here regarding the SIC codes, and he stated they're not very useful discriminators, as HMRC already know what sort of business you operate from how it was classified when it was founded, and possibly the CT600 depending on its type.

    TBH, I couldn't see them not first applying the dividend:salary ratio to rule out cost-ineffective cases (as far as IR35 even concerns itself with this) first. This still doesn't really narrow it down very much, however, unless the contractor in question is extracting very high dividends relative to salary, which may end up being tax-inefficient, so targeting delinquent accounts, targeted campaigns and pulling companies out of a hat seem the likeliest approaches, as well as leaving it a few years to increase the pelf should they win.

    I recall it was even mentioned they may specifically target firms where the contractor calls it something like "Joe Bloggs Services". In reality, they probably are stuck in the dark barring the above methods. Even trying to extract more "useful" information on the P35 may not work, due to the sheer number of PSCs that would answer in this way, relative to investigations conducted (even if they were to increase tenfold, with no suggestion of their abysmal loss ratio changing), leaving them with the same problem as before. The HoL don't seem to be very impressed with their performance on this matter and their figures don't add up. The value they envisage in it is the amount it "protects" through deterrence (which doesn't add up, either), rather than the direct yields of investigations, so they are probably quite content with keeping it this way, thus their blasé attitude to its horrendous cost efficiency. The government seems happy with this all too. So I just expect more of the same of this dysfunctional, very blunt rule, until NI/income tax are merged, which seems likelier as time goes on (pressure is mounting for this to happen and the Tories seem poised to position it in their platform), which may explain the apathy. It definitely has a deterrent effect, even if not to the tune of £500m, and brings in some nominal sums, so it's "working" for now, until it becomes obsolete, and hey, it has the incidental benefit to some of creating an industry out of the fear factor.

    In the meantime, I'll stick with contract reviews and IR35 insurance for as long as I am a contractor and it exists, given the trivial cost of both and their potential benefits.
    Last edited by Zero Liability; 4 July 2014, 23:21.

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  • Contreras
    replied
    Originally posted by BlasterBates View Post
    There are thousands of audits but only a handful of IR35 investigations. So the IR35 expert gets Joe, John, Pete and 100 others on his desk from various auditors and has to decide which one he wants to investigate, oh look John has max dividends and min salary and Pete has a salary of 30 grand. IR35 investigator will go for John.
    Assuming all other things being equal - that Joe, John, Pete and the 100 others, had equal turnover, made similar pension contributions, shared the same SIC code, and all did/did-not have tax investigation insurance - otherwise it's speculation that salary/dividend ratio is any more important than those other things that can be discovered without much effort.

    I find it sad that with the industry that IR35 has spawned, over a decade and thousands of investigations, we are still second guessing what factors, if any, affect the likelihood of an enquiry.

    Leave a comment:


  • tractor
    replied
    ..

    Originally posted by jamesbrown View Post
    You need to think about this in terms of conditional probability. Unless the conditioning variables (audit, salary/dividend mix,..) have any relationship with the variable of interest (investigate/do not investigate), the probability of investigation does not change as a function of the value of those conditioning variables. As clearly stated above, salary/dividend mix is a useless conditioning variable because the number of PSCs with directors that have a low salary/high dividend mix is much higher than the number of investigations that take place. Thus, your premise is flawed at the point you introduce Joe as an individual with high salary/low dividend mix, distinct from the remaining 100+ sample. The point is that the number of people being audited will overwhelmingly comprise people with a low salary/high dividend mix (just like the broader population) and hence there is no meaningful increase in the risk of investigation conditionally upon salary/dividend mix. You need to identify many more conditioning variables before you can get to the point where salary/dividend mix may be a decisive factor. There's only so many ways I can make this point
    When mainframes started producing lists people used to think about it this way....

    If you are talking about advertising media your co name should begin with A so you are first in any list.
    If you are talking about taxation, your co name should begin with X, Y or Z so you are last in any list.

    Most civil servants are lazy, trust me they are. They will take the first or a random name and bin the rest. Yes there may be some programmed logic in producing the list in the first place, but I would so love to see it. If it chooses by SIC code, it is probably proof that they lied to the EU when first challenged over this by the PCG. I didn't follow the HoL dicussion but I wonder if they were challenged on how many maids/servants and non IT PSCs were investigated?

    Leave a comment:


  • jamesbrown
    replied
    Originally posted by BlasterBates View Post
    There are thousands of audits but only a handful of IR35 investigations. So the IR35 expert gets Joe, John, Pete and 100 others on his desk from various auditors and has to decide which one he wants to investigate, oh look John has max dividends and min salary and Pete has a salary of 30 grand. IR35 investigator will go for John.

    A) it's a good indicator
    B) he'll get a lot more from John than Pete

    If we were to take this to extremes i.e. you pay yourself 1% dividends, I think it is obvious you'll never get investigated. i.e. you have 0% chance of being caught this risk will increase gradually until you've maxed out your dividends.

    So it is a risk factor that you can reduce by increasing your salary.

    ...and an HRMC ex-inspector has said this.

    I think the idea of the 12 grand is although it's only a small difference which would be irrelevant once the investigation is underway, when the IR35 investigator is running his selection routine on 100 candidates you won't be top of the list.
    You need to think about this in terms of conditional probability. Unless the conditioning variables (audit, salary/dividend mix,..) have any relationship with the variable of interest (investigate/do not investigate), the probability of investigation does not change as a function of the value of those conditioning variables. As clearly stated above, salary/dividend mix is a useless conditioning variable because the number of PSCs with directors that have a low salary/high dividend mix is much higher than the number of investigations that take place. Thus, your premise is flawed at the point you introduce Joe as an individual with high salary/low dividend mix, distinct from the remaining 100+ sample. The point is that the number of people being audited will overwhelmingly comprise people with a low salary/high dividend mix (just like the broader population) and hence there is no meaningful increase in the risk of investigation conditionally upon salary/dividend mix. You need to identify many more conditioning variables before you can get to the point where salary/dividend mix may be a decisive factor. There's only so many ways I can make this point

    Leave a comment:


  • BlasterBates
    replied
    Originally posted by jamesbrown View Post
    But there is no targeting unless the targeting variables (salary/dividend mix) provide a conditional sub-sample that is usefully smaller than the overall sample of PSCs. In this context, usefully smaller is defined as a value similar to the number of enquiries opened (otherwise, by definition, you have other, unspecified, targeting variables that are much more important). I'm saying it doesn't do this, because a low salary/high dividend mix is standard operating procedure for PSCs (seething slightly at using that acronym, but...). In contrast, what we do know is that IR35 enquiries may begin with random sampling or with aspect enquiries, which themselves result from something being flagged as dubious (incorrect filing, late filing etc.). So I know which one I'd focus on. Not that I spend any time worrying about this (seriously), because it's all idle speculation and I prefer to focus on what matters, i.e. operating a business and conducting due diligence w/r to legislation.
    There are thousands of audits but only a handful of IR35 investigations. So the IR35 expert gets Joe, John, Pete and 100 others on his desk from various auditors and has to decide which one he wants to investigate, oh look John has max dividends and min salary and Pete has a salary of 30 grand. IR35 investigator will go for John.

    A) it's a good indicator
    B) he'll get a lot more from John than Pete

    If we were to take this to extremes i.e. you pay yourself 1% dividends, I think it is obvious you'll never get investigated. i.e. you have 0% chance of being caught this risk will increase gradually until you've maxed out your dividends.

    So it is a risk factor that you can reduce by increasing your salary.

    ...and an HRMC ex-inspector has said this.

    I think the idea of the 12 grand is although it's only a small difference which would be irrelevant once the investigation is underway, when the IR35 investigator is running his selection routine on 100 candidates you won't be top of the list.
    Last edited by BlasterBates; 4 July 2014, 16:44.

    Leave a comment:


  • speling bee
    replied
    Originally posted by sal View Post
    If ifs and buts were candy and nuts....

    No one (even HMRC) knows what method HMRC uses to pick targets for IR35. And even if someone knew what they are using now, this can change in the future. So in IMO if you are going to pay more NI, just to potentially shield yourself from a potential IR35 investigation, that you might potentially lose, you might as well just declare yourself inside IR35.

    Personally i think 20% CT + 16.5% VAT is enough
    Explain the VAT bit.

    Leave a comment:


  • sal
    replied
    If ifs and buts were candy and nuts....

    No one (even HMRC) knows what method HMRC uses to pick targets for IR35. And even if someone knew what they are using now, this can change in the future. So in IMO if you are going to pay more NI, just to potentially shield yourself from a potential IR35 investigation, that you might potentially lose, you might as well just declare yourself inside IR35.

    Personally i think 20% CT + 16.5% VAT is enough

    Leave a comment:


  • Zero Liability
    replied
    Again, to provide some context, on HMRC's own figures (which could be understating the issue), there are 200,000 PSCs, of which some 50% of directors draw more than 50% of their income in dividends, if I recall correctly. If tens of thousands of directors pay themselves minimum salary, which I (reasonably) assume is not uncommon amongst contractors, they don't learn anything useful by filtering based on this result, which doesn't really tell them anything, anyway. It is reasonable to assume that they do profile based on dividends:salary ratios as a) they've stated as much and b) this helps them identify targets that will yield higher loot as all else being equal, this ratio will vary with the day rate, but even so, this doesn't narrow things down beyond bringing some minimal cost-benefit considerations to the fore. I think like James is saying, they may go for cases where there's already some mishaps going on, beyond their targeted campaigns and random sampling.

    Their "win" ratio is abysmal, however, and I wouldn't be surprised if their "wins" mostly include individuals with no awareness of IR35, no protection, who call their clients "employers", their dividends "salary", use terms like "clocking in" etc. Maybe more clients are just refusing to speak to them beyond referring them back to the contract.

    Leave a comment:


  • jamesbrown
    replied
    Originally posted by BlasterBates View Post
    If late filing was a better indicator of being outside IR35 I think they would use it, and the ex-inspector would have mentioned it.

    HMRC doesn't have access to critical info such as working practices, they really just have simple information such as it is a Personal Services Company, there is one Director and he's on a minumun salary, so they have to make their targeting decision based on that. To get anymore information would require an audit from an IR35 specialist and they're thin on the ground so I doubt they turn up to all the late filing audits. Lets face it even if the auditor were to the ask to look at a contract since almost all of them have been written to be outside IR35, they're not much use.
    But there is no targeting unless the targeting variables (salary/dividend mix) provide a conditional sub-sample that is usefully smaller than the overall sample of PSCs. In this context, usefully smaller is defined as a value similar to the number of enquiries opened (otherwise, by definition, you have other, unspecified, targeting variables that are much more important). I'm saying it doesn't do this, because a low salary/high dividend mix is standard operating procedure for PSCs (seething slightly at using that acronym, but...). In contrast, what we do know is that IR35 enquiries may begin with random sampling or with aspect enquiries, which themselves result from something being flagged as dubious (incorrect filing, late filing etc.). So I know which one I'd focus on. Not that I spend any time worrying about this (seriously), because it's all idle speculation and I prefer to focus on what matters, i.e. operating a business and conducting due diligence w/r to legislation.

    Leave a comment:


  • tractor
    replied
    ...

    Originally posted by Pondlife View Post
    @22:47



    @23:05


    FFS
    LOL did Boulderbrain forget to take his sockies off before posting?

    Leave a comment:

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