Reply to: Who pays IR35 tax and NI - Director or intemediary?

[Contreras]

If you left PermCo and they had buggered up your NI ded'ns, you'd expect HMRC to recover the underpayment from you.

If the discrepancy came to light then HMRC would be chasing PermCo. With the odd rare exception, PAYE makes the employer liable for all tax due on any payments to the employee even if those payments are in error.

[mudskipper]

On the face of it, it would seem logical that the Employer's NI liability is company debt, the employee's NI liability personal. If you left PermCo and they had buggered up your NI ded'ns, you'd expect HMRC to recover the underpayment from you.

But HMRC don't always do logic...

[jamesbrown]

Semantics. IR35 is based wholly on the premise that the company is merely a payment vehicle to process personal income. While the money is paid by the company, the whole point is that the company is assumed to have no purpose other than the payment of wages and is levied on the basis that the monies earned are personal to the worker. Also, remember that the only real protection against IR35 is to be seen as a business, the clear implication being that if you are caught, you are not a business. Hence the tax, to all intents and purposes, is a personal one. The point has never been tested, as far as I know, so remains somewhat theoretical


Agreed, but I felt it important that people understand that you can't simply assume the company is the end point and ignore the personal liability that may occur, especially if you have (in HMRC's eyes) blatantly disregarded the potential tax liability.

I don't dispute your underlying sentiment (that, in the absence of due diligence, transfer of liability is a real risk), but this isn't a question of semantics at all. First, as you know, liability to operate a deemed payment is made on a contract-by-contract basis. There is no attempt to identify the company as a sham or "payment vehicle" in some general sense, only that a specific contract bears a closer resemblance to one of employment. For that reason, as you know, the main criteria in establishing liability are contract-specific and any other "in business" factors are contextual (although not unimportant). In practice, therefore, although uncommon, it is perfectly reasonable to operate a deemed payment on one contract, but not another, if the facts support that position. Second, the rules surrounding transfer of liability are not specific to IR35, but general to all instances where the employer fails to deduct the appropriate amount of tax and has reason to know better.

[northernladuk]

I thought the JLJ case held him personally responsible on the half loss so it has been proven?

[malvolio]

First, IR35 is not a tax on the individual, it is a tax on the employer. The intermediary is looked through for the purposes of establishing a hypothetical contract of employment, but the intermediary remains liable for operating PAYE appropriately (and thus the IR35 deemed payment).

Semantics. IR35 is based wholly on the premise that the company is merely a payment vehicle to process personal income. While the money is paid by the company, the whole point is that the company is assumed to have no purpose other than the payment of wages and is levied on the basis that the monies earned are personal to the worker. Also, remember that the only real protection against IR35 is to be seen as a business, the clear implication being that if you are caught, you are not a business. Hence the tax, to all intents and purposes, is a personal one. The point has never been tested, as far as I know, so remains somewhat theoretical

Liability can be transferred to the director if they've acted negligently in establishing and documenting the liability, but there is a suitably high bar for this. Here's a useful blog post on the topic by Jessica@WhiteFieldTax:

https://www.whitefieldtax.co.uk/web/...-a-individual/

Agreed, but I felt it important that people understand that you can't simply assume the company is the end point and ignore the personal liability that may occur, especially if you have (in HMRC's eyes) blatantly disregarded the potential tax liability.

[jamesbrown]

First, IR35 is not a tax on the individual, it is a tax on the employer. The intermediary is looked through for the purposes of establishing a hypothetical contract of employment, but the intermediary remains liable for operating PAYE appropriately (and thus the IR35 deemed payment). Liability can be transferred to the director if they've acted negligently in establishing and documenting the liability, but there is a suitably high bar for this. Here's a useful blog post on the topic by Jessica@WhiteFieldTax:

https://www.whitefieldtax.co.uk/web/...-a-individual/

[mudskipper]

If that's true then almost all of us need to worry, since certainty and IR35 are a pretty bad mix ...

True that - if you want certainty, declare yourself inside. Otherwise take the precautions that mal described and don't lose sleep over it.

[malvolio]

If that's true then almost all of us need to worry, since certainty and IR35 are a pretty bad mix ...

So understanding the legislation and extant case law, getting your contracts reviewed, ensuring the working practices are aligned to that contract and having good professional representation on tap is pretty much key then, don't you agree? You can then argue against claims of negligence and mount a solid defence that you weren't actually caught anyway.

Simply closing the company to leave it all behind won't work.

[borderreiver]

Not catering for IR35 liability if you are not certain it is not due would count...

If that's true then almost all of us need to worry, since certainty and IR35 are a pretty bad mix ...

[malvolio]

Interesting link. I think the important bit is this:

QUOTE=mudskipper;2097860]It is clear that an employee or director has received payments knowing that the employer had deliberately failed to deduct the correct amount of PAYE from their earnings

Proving the non-payment was deliberate is key, surely?

Not catering for IR35 liability if you are not certain it is not due would count...

[borderreiver]

HMRC can transfer liability.

Optimum PAYE - June 2012 - Transfer of Employer PAYE & National Insurance liabilities to Directors

Interesting link. I think the important bit is this:

It is clear that an employee or director has received payments knowing that the employer had deliberately failed to deduct the correct amount of PAYE from their earnings

Proving the non-payment was deliberate is key, surely?

[borderreiver]

A director's primary legal requirement is to ensure the company is solvent. If you have ignored IR35 liability, or made an unsupportable conclusion about your status, and therefore used the money that IR35 requires to be paid, then you have failed in that duty and can be prosecuted as a director. Limited liability does not extend to what is essentially criminal behaviour.

I don't think anyone is talking about criminal behaviour here.

Again, I'm just reporting what I've read, but while I appreciate it's a director's duty to keep a business solvent, what happens to businesses that simply can't pay CT because a major customer let them down? It happens (maybe not in IT contracting, I admit). Are you saying those directors should be prosecuted?

I agree that HMRC is likely to vigorously pursue such debts, as it should, but if a company has no assets HMRC can't just transfer liability, though it may stamp its foot and threaten to do so.

[mudskipper]

From what I have read on other business boards, it appears not (unless HMRC can prove negligence or worse). A company's debt remains a company's debt. That's the main point of limited liability IMHO.

You might end up having to wind up the company, of course, and HMRC would probably object, but I don't think they can recover a debt from a director in this case.

HMRC can transfer liability.

Optimum PAYE - June 2012 - Transfer of Employer PAYE & National Insurance liabilities to Directors

[malvolio]

From what I have read on other business boards, it appears not (unless HMRC can prove negligence or worse). A company's debt remains a company's debt. That's the main point of limited liability IMHO.

You might end up having to wind up the company, of course, and HMRC would probably object, but I don't think they can recover a debt from a director in this case.

Except...

Look at it from HMRC's viewpoint. A director's primary legal requirement is to ensure the company is solvent. If you have ignored IR35 liability, or made an unsupportable conclusion about your status, and therefore used the money that IR35 requires to be paid, then you have failed in that duty and can be prosecuted as a director. Limited liability does not extend to what is essentially criminal behaviour.

Also, who authorises the closure of a company? That's HMRC, who are looking to recover the unpaid tax...

And finally, IR35 is a tax on the individual, not the company.

[borderreiver]

What if the company does not have the funds pay? Does the responsibility get transferred to the director?

From what I have read on other business boards, it appears not (unless HMRC can prove negligence or worse). A company's debt remains a company's debt. That's the main point of limited liability IMHO.

You might end up having to wind up the company, of course, and HMRC would probably object, but I don't think they can recover a debt from a director in this case.