Reply to: Dividends versus PAYE

s660 and IR591

In a husband and wife company, where only one is the 'fee-earner', then splitting salary to reduce tax can be attacked by the Inland Revenue under section 660.

If you're caught by IR35 there's no benefit in splitting salary anyway, as it will all be your deemed salary, and will pay tax and NIC on that basis.

If not caught by IR35 then you may do best to pay small salaries (up to the personal allowance level or a little over) and the remainder as dividends.

There is a current s660 case (Arctic Systems) which I think is soon to come to court, in which the Inland Revenue are claiming a total of £42,000 in tax going back six years. It's a new interpretation of old legislation and highly controversial. There are possible ways around it - for example by holding all the shares in joint names and claiming an automatic 50/50 split under s288 (just like happens on interest paid from joint bank accounts) - but none of these have been tested in court under the IR's new interpretation of s660.

In any case, both s660 and IR35 itself may become less important or even irrelevant in April, depending on what is implemented for "IR591". So you'll find right now that it's unlikely even your accountant could give you any meaningful advice on what to do for the best.

Re: Profit

I am just about to start on my first contract. My husband and I (where have I heard that before) are both directors of our company.
I am not sure if my contract is caught by IR35 or not.
At the moment I am the only one earning any income, what are the implications if I split my income into 2 'salaries', 1 for me and one for my husband ?

Re: Profit

No, I'm not saying anything different.
I was merely identifying a course of action that could be taken if for some reason a contractor specifically did not want to take the net deemed salary.

Re: Profit

Debbie - SimonSJD above confirmed optimally you should always take your full IR35 salary, and loan it back to the company if required. Are you saying something different, and why if it may create a tax liability that Simon's way avoids?

On another point, I believe the CT rate for small companies this year is 0%, which may affect some of the previous comments.

Re: Profit

Didn't actually advise not to take the deemed salary, what I actually said was

"There may be reasons why you don't want to process the full IR35 salary as actual salary ....."

ITAccounting Online - Truly Interactive Internet Accounting

Re: Profit

You calculate the deemed salary on 5th April, and pay the TAX/NI. But let’s say that you don’t actually pay yourself the net deemed salary (as suggested by Debbie). When your year-end comes round you are not allowed to deduct that net deemed salary from your profit. So you could get taxed on it again.

So to clarify I should have said, “you cannot offset the net deemed payment against corporation tax unless you have actually paid that net deemed payment within the accounting period in question.”

Re: Profit

"you cannot offset the deemed payment against corporation tax unless you have actually paid that deemed payment out as salary."

That's ain't right.You do deduct a deemed payment when calculating CT but you certainly do not then pay it out as salary - that gives rise to double taxation as the article says, but as dividend.

Bit academic really, the whole thing is total and utter nonsense and typical IR complication. There is no purpose whatever in paying tax and NI on a 'deemed payment'. Since the amount paid is exactly the same as if you had paid the equivalent amount of salary, and is due at exactly the same time, you might just as well pay salary. That way you do not have to apply for exemption from higher rate tax on dividends.

Re: Profit

I “think” the point is you cannot offset the deemed payment against corporation tax unless you have actually paid that deemed payment out as salary.

I got the following article from some accountancy web site (but I can’t remember exactly where). Maybe one of the accountants can explain (well to be fair Simon already has)

---------
(1) Salary after the deemed payments calculation

The deemed payment calculation under IR35 does no more than determine the amount of tax and NIC to be paid by the company to the Revenue. Any subsequent, actual salary payment cannot be ‘franked’ by the tax and NIC paid. Therefore, if an amount is paid as salary after the deemed calculation has been made, it too will be subject to tax and NIC. This means that tax is paid twice on what are essentially the same funds.

The only ways to avoid this double charge are either to distribute the funds as a dividend rather than a salary or to ensure that remuneration is paid before 5 April. Finance Act 2000, Sch. 12, para. 13 prevents a double tax charge where a dividend is paid in the same accounting period or in one subsequent to that to which the IR35 charge relates.

(2) Corporation tax issues

A deduction is given for corporation tax only when the deemed payment is treated as paid (Sch. 12, para. 17(1)). As very few companies have an accounting date which coincides with 5 April, this causes complex timing problems. Assume a company has a 31 March year-end and makes a deemed payment at 5 April following its accounting period. The deduction will not be given for the deemed payment in its 31 March accounts. Therefore, tax is paid on the full accounting profits as if IR35 does not apply. Then tax is paid again on what is effectively the same funds a few days later, on 19 April.

Of course it is true that the IR35 amount is then allowable against profits in the following year. However, if the individual receives further IR35 income in each subsequent year, no relief is ever obtained for the effective double charge at the beginning of the regime.

Re: Profit

Agree with ahadayah . Do not follow some of the other comments.

You pay Corporation Tax on profit at year end. Profit is income less expenses, which, if caught by IR35, includes the gross deemed payment and the employer's NI on it. Profit is not determined by what is in the bank account at year end.

Money retained in the company is not taxable a second time although is not a great idea leaving large amounts in due to crap interest rates on business accounts. Also paying out roughly in accord with payslips/ divi vouchers might help
avoid any arguments that payments were loans, or that you were paying salary and not divis.

Profit

Not only does it look like a profit, it is a profit. Pay up.

Hector: Ka-ching. Ta.

Re: IR35

I think if you leave that money in the company it looks like a profit at year-end, and you get taxed on it.

But I’m sure a proper accountant can tell us…

Re: IR35

" ... advised me at the time when IR35 was introduced to up my nominal salary ..."

My accountant recommended the same; which I did. PAYE review (and still-running IR35 questions) happened anyway. I have good contracts however and my working practices should put me outside. Once the investigation is over, f/ck them. I'm taking the salary back down to the minimum.

As for the "if you don't take all your deemed salary out as salary otherwise you'll be subject to double taxation" comment (from an accountant) :

How? What extra tax would I pay subsequently taking that money out of the company as a dividend that hasn't already been paid for as part of the IR35 deemed-salary payments?

Re: IR35

Agree totally - we would always advise to pay the whole amount (or at the very least provide for it in your year end accounts). If the Company does need funds then loan them back.

There would be no further Corporation Tax to pay regardless of whether you left the funds in the Company or not, but there could be potential double tax complications personally.

IR35

Regarding Debbie's point - "As far as the Revenue is concerned you only have to pay the Tax and NIC on the deemed IR35 salary, you do not have to pay the net salary"

Surely it is always advisable to pay the whole salary, if the alternative is to leave it as company money which might attract further taxation in the future? Instead, if the company needs extra funds, pass it money back as a loan from the director, which can be returned in the future without taxation.

I am not an accountant, so will appreciate correction or comment.

PAYE

My accountant who does not specialise in IT by the way but is aware of IR35 legislation and all that advised me at the time when IR35 was introduced to up my nominal salary to a decent level of say £ 20 k pa and thus avoid the immediate risk of being caught, as seemed likely at the time. The logic was that companies that do a t/o of equal to 2-3 times of total salaries are likely to escape any net, as others with nominal ones.
This obviously has other advantages as getting bank loans, cards etc on the strength of individual and not company earnings and disadvantages like paying yourself when not earning.