Reply to: Are you outside IR35 if you already pay full NI and tax?

[DeludedKitten]

HMRC don't fish for tiddlers and the days of random tax investigations are long since gone.

What criteria do they use? From what I can see on the various tax returns there is nothing that indicates what percentage of income is IR35 caught and what isn't. If you have both inside and outside contracts (as some do) then you indicate that you are inside IR35 but there is no way to say "but that's only £10k which goes into my pension pot and the rest of it is outside IR35".

So how do HMRC know whether to investigate or not?

It should always be borne in mind that a tax inspector will attach much more importance to what happens in practice than to what is in the written contract. HMRC have upped their game in recent years and quite a few people believe that most contractors would fail an IR35 audit nowadays if audited by a properly trained and fully competent tax inspector.

Which presumably accounts for the 75% loss rate that HMRC have suffered at tribunal this year??

[LondonManc]

To be honest, I'd say that as long as you're operating properly like a business - insurance, own website, etc, while also ensuring contracts and working practices match and are outside IR35 then the standard 11k pa + dividends is the correct structure to use. It is the one that cannot be defeated in court if you're outside IR35. It won't be subject to a scheme enquiry or retrospective action. If you go for the greedy option of ooh, look, you can take home 8x% of your invoice, then you're asking for trouble.

[rogerthedodger]

HMRC don't fish for tiddlers and the days of random tax investigations are long since gone. Therefore if you're treating all your income (apart from business expenses) as salary and employer NIC then it's very unlikely indeed you'd be investigated. If you end up with e.g. 60K net taking salary instead of 70K net taking dividends, then with 60K you're not going to starve, and you don't have the hassle of faffing about building up a 'defence dossier' for every contract (which in itself costs time and therefore money). Obviously the 10K difference in the above example is a lot of money to let go, but of course everything depends on how much money you actually want or need. I know a few independent consultants and interim execs who do more or less what you do and take a 'proper salary'. They don't need the extra money and they don't want all the grief of an investigation, which can be very time consuming and stressful.

It should always be borne in mind that a tax inspector will attach much more importance to what happens in practice than to what is in the written contract. HMRC have upped their game in recent years and quite a few people believe that most contractors would fail an IR35 audit nowadays if audited by a properly trained and fully competent tax inspector. Therefore by doing the salary option, you can at least sleep at night.

[Maslins]

Indeed but why on earth would you give up the efficiency of the LTD model just to avoid an investigation. Might as well go brolly and sleep easy if you are that worried. Seems a bit of a daft discussion to me.

For me I never got the logic of "I'll pay myself £12k/year instead of ~£8k/year as that'll make me safe". You've then got all the faff of PAYE/NICs (albeit small sums, but still annoying from an admin perspective), and in reality the overall tax difference is minor. Therefore I can't see it making you safe from investigation, as you're still likely paying far less tax than inside IR35. Also for a medium to high earning contractor, where perhaps a salary of £40-100k might be a genuine fair salary for the work, how is paying a £12k salary any better than £8k?

I do think that's very different though to a situation where perhaps someone has a company where 90% of their work is outside IR35, but they do one brief stint where it seems clear it's inside. More out of laziness than anything else, I can understand why people might just decide let's pay a big salary for those few months and accept the PAYE/NIC hit, but not formally declare themselves inside IR35.

If all of someone's work will be inside IR35, then yes I'd be with you that umbrella seems to make more sense. I have heard some people say they'd still prefer to be Ltd Co for a few reasons. Eg no middleman taking the cash that could go bust...but I don't think it's worth the hassle personally.

[northernladuk]

It's abundantly clear that an inspector is going to chase those contractors who've saved the most tax. Some contractors adopt the strategy of paying a little more than the minimum just to remove themselves from the target group, and I dare say it may have some merit. My view is if you pay yourself a decent salary and some divis and retain some capital then you're unlikely to be a target for investigation, because it doesn't fit the profile of running the company simply to dodge tax.

Indeed but why on earth would you give up the efficiency of the LTD model just to avoid an investigation. Might as well go brolly and sleep easy if you are that worried. Seems a bit of a daft discussion to me.

[BlasterBates]

It's abundantly clear that an inspector is going to chase those contractors who've saved the most tax. Some contractors adopt the strategy of paying a little more than the minimum just to remove themselves from the target group, and I dare say it may have some merit. My view is if you pay yourself a decent salary and some divis and retain some capital then you're unlikely to be a target for investigation, because it doesn't fit the profile of running the company simply to dodge tax.

[Maslins]

Ummm...compare the revenue raised with the costs of implementation and enforcement, remembering that the OBR economic and fiscal outlook from March highlights the "expected cost of tax litigation losses"

Ah, I see your point, looking at it from HMRC's perspective and including costs. I was considering it from the contractor's perspective where being successfully challenged can be very expensive. Apologies.

[DeludedKitten]

Ummm...quite often there is a huge amount of tax at stake with IR35 cases?

Ummm...compare the revenue raised with the costs of implementation and enforcement, remembering that the OBR economic and fiscal outlook from March highlights the "expected cost of tax litigation losses"

[Old Greg]

Isn't that the whole point of IR35 - HMRC bother for negligible extra tax?

Ummm...quite often there is a huge amount of tax at stake with IR35 cases?

The main point of IR35 is probably to scare contractors into brollies.

[Maslins]

Isn't that the whole point of IR35 - HMRC bother for negligible extra tax?

Ummm...quite often there is a huge amount of tax at stake with IR35 cases?

[DeludedKitten]

Why would HMRC bother if there's negligible extra tax at stake.

Isn't that the whole point of IR35 - HMRC bother for negligible extra tax?

[Hobosapien]

One could argue you're very unlikely to be challenged if you declare yourself outside IR35 anyway.

Have HMRC investigations ramped up now they only have to investigate a small number of 'rogue' contractors not already inside IR35 in the public sector, and likely same when it is applied to private sector so their investigators have a smaller pool to investigate.

Hopefully there will be a high enough percentage automatically inside IR35 that HMRC makes all the IR35 investigators redundant or moves them onto something else.

[Maslins]

I don't disagree with the posters above...but from a practical perspective, if you're basically declaring yourself outside IR35 whilst voluntarily making "bad" choices which mean you pay virtually all the tax you would have done if inside IR35, then I'd agree you're very unlikely to be challenged. Why would HMRC bother if there's negligible extra tax at stake. It's not technically "right", but I don't necessarily think it's a bad idea, indeed we've suggested it for a couple of our clients at times.

It's a little bit like claiming a very contentious business expense. If it's a tenner, who cares...it may be wrong, but it's not worth wasting time arguing about it. If it's £10k on the other hand, it is worth taking more care to ensure it's dealt with properly.

[LondonManc]

Regardless of your contract
- If your Ltd makes 100k a year
- Your expenses are 10k a year, paid by your Ltd
- And you draw the remaining salary of 90k a year, paying the corresponding NI and income tax due

Are you less of an interest for ir35 investigation? Or is it more about your contract than your self-assessment?

A contract is inside or outside IR35, not a person.

[mudskipper]

Regardless of your contract
- If your Ltd makes 100k a year
- Your expenses are 10k a year, paid by your Ltd
- And you draw the remaining salary of 90k a year, paying the corresponding NI and income tax due

Are you less of an interest for ir35 investigation? Or is it more about your contract than your self-assessment?

Technically you still need to consider IR35. If "inside" then T&S expenses are not allowed.