Reply to: IR35 Implication

[malvolio]

I like said IR35 is real problem, I never intented to go contracting but the circumstances pushed me.

ZoppZ

Oi! Hang on a minute!! You're getting this backwards.

The argument against IR35 is that it set out to stop one form of tax avoidance - the Friday to Monday scenario - and ended up attacking all small companies. I may be a one-man band, as is my corner newsagent and the guy that services the wife's car, but we are no less real businesses for all that. There is nothing "different" about being an IT contractor to any other independent business, and if you can find one I'm sure HMRC would be delighted to have it explained to them.

I use MyCo becuase I have to to stay in business, but legally, MyCo has exactly the same standing as Marks and Spencers. People sometimes need to remember that minor detail.

[ZoppZ]

By defult I am the first situation as described above and looking get out ASAP. The problem I face with the second point: to sell and engaged the prospects, I need to have a limited company with VAT registration to qualify to take part in tendering/RFI/RFQ process. Also, they look for how long you have been in business, etc. I like said IR35 is real problem, I never intented to go contracting but the circumstances pushed me.

ZoppZ

[philip@wellwoodhoyle]

A couple of points to ponder.

Firstly, if you really expect to give up contracting and will have a "real" business in the very near future, you may decide to take the risk and not adopt IR35 rules. After all, there are loads of IR35-caught companies who are blatantly ignoring it despite having no intention of having a "real" business. At present, it appears HMRC have a very low success rate in catching people. If your company starts other income streams and its company accounts clearly shows a growing asset base and "doesn't look like" a typical IT contractor, then your risk of being caught reduces. Please note that I am not advocating this approach, but you appear to be in a much better position to argue your case than someone who is just hoping never to be caught. Of course, it would be even better if your contract was marginal as to its IR35 position. But, don't forget, you do run a very real risk as it is each individual contract that matters, not necessarily the overall picture. As far as I know, the fact that other business activities are being operated alongside contracting has not yet been tested in the caughts for IR35 purposes.

A second thought is whether you could at least save some tax by operating your new business venture as a sole trader. Losses made as a sole trader can be offset against other taxable income, so you could at least get tax relief for the losses, though there is no corresponding relief for the NIC paid under the IR35 regime. This is only useful if you aren't adverse to the personal risk exposure of not having limited liability - it depends what you are doing whether this is relevant or not. When the new ventures start to be profitable, transfer them into your limited company.

[ZoppZ]

I think we are moving away from the real issues; the "IR35".

In my case, I choose to use most of contrating income to fund the development of business; NOT to pay large dividends, NOT to pay huge salary or NOT to pay my wife a salary. Any salary or dividends I take is taxed. The day I sell my software to someone I will stop contracing and may even employ other people. Other businesses are allowed to reinvest their profits without being penalised and considered TAX CONs. IR35 is blanket instrument that deters people like to me create wealth by taking risks.

The LAW is an ASS.

[tim123]

I'm not saying that it's black and white, my comment was meant to be a tongue in cheek example rather than a hard and fast rule.

There are other ways of getting money to fund a venture, but what the Revenue are saying is that it doesn't come from us. Or more to the point they are saying, you don't just decide to take it from us.

The fact of the matter is, that if you have an idea for a venture that requires funding, the money has to come from some third party, somehow. There are ways that you can get money from HMG in this situation, but you have to ask for it properly not just take it.

If you have a venture that require funds, you have to pitch for the money properly, with business plans, presentations to the right people etc.

If you have a venture that you can't fund, it's not because the money isn't available, it's either because the venture isn't viable or because you haven't pitched it properly.

Look at the dross that is pitched on Dragon's Den (the ones that get the 30 second slots, not the 10 minute slots). Do you really think that these people should be allowed to dip into their tax money to fund their (often) stupid ideas.

tim

[ZoppZ]

Black and white it certainly isn't.

Don't get me wrong. I am not for increasing tax. Neither do I envy other people their money. My rant is about lack of level playing field. Very high earners and big businesses have a definite advantage in this country that small startups don't seem to enjoy.

I agree with you entirely.

ZoppZ

[kingshuk]

If things are as black & white as Tim suggests...

Black and white it certainly isn't.

There are numerous ways of not paying tax legally in this country if the money involved is large enough.

For example -

corporate profits as a share of GDP have increased on average from 21.5% to 22.5% since 1999, while the proportion paid in corporation tax has fallen from 15% to 14.1%. As a result, corporation tax paid as a proportion of GDP has been almost exactly fixed at 3.2% over this period.

from http://business.guardian.co.uk/story/0,,1892389,00.html

"Non-domiciled tax rule" is used not only by the super wealthy any more but by City traders and bankers quite regularly. http://money.guardian.co.uk/tax/stor...755287,00.html

Earlier post about Venture Capital Trust Funding is another area where large tax advantages are available if you have serious amount of money you would like to bet (minimum investmnet usually starts from GBP250K to 500K).

Don't get me wrong. I am not for increasing tax. Neither do I envy other people their money. My rant is about lack of level playing field. Very high earners and big businesses have a definite advantage in this country that small startups don't seem to enjoy.

[ZoppZ]

borrow against the house, like (almost) everyone else staring a business does.

tim

I have already borrowed against house...enterprising..flexible..I am. The fact is this government is willing to tax everything inlcuding itself: the case of Olympic 2012 funding. If things are as black & white as Tim suggests, the regime in the country has become 'Carry On Henry' type regime - Tax on Sex is on its way!

ZoppZ

[kingshuk]

borrow against the house

Hmmm... its probably a sign of how long the housing boom had been going on when so many assume that everyone else owns a house.

[tim123]

So what is a "small business" suppposed to do that can't attract VCT/private equity fund or doesn't want to attract private fund yet :-(

borrow against the house, like (almost) everyone else staring a business does.

tim

[kingshuk]

I.e. you can't divert the tax free earnings from an 'employment' to fund another venture and hence create the opportunity to save some tax if the venture goes tits up (because the lost money would have been paid in tax anyway) or save some tax if it is successful (because the tax regiem is more friendly towards the 'venture' than employment).

You may not like this, but I don't see how you can argue that its unfair, it's the same for everyone (except that 99.9% of the population don't want to do it).

Well not quite. The government does allow "diverting the tax free earnings from an 'employment' to fund another venture" -

http://news.bbc.co.uk/1/hi/business/3713940.stm

http://www.hoodlessbrennan.com/artic...rivate-equity/

and hence create the opportunity to save some tax if the venture goes tits up

A quick search will show that a _VERY_ large number of these ventures fail.

So what is a "small business" suppposed to do that can't attract VCT/private equity fund or doesn't want to attract private fund yet :-(

[ZoppZ]

The Governemt is saying that you can't do this.

I.e. you can't divert the tax free earnings from an 'employment' to fund another venture and hence create the opportunity to save some tax if the venture goes tits up (because the lost money would have been paid in tax anyway) or save some tax if it is successful (because the tax regiem is more friendly towards the 'venture' than employment).

You may not like this, but I don't see how you can argue that its unfair, it's the same for everyone (except that 99.9% of the population don't want to do it).

If you need funds to complete a venture, you are expected to find someone other than the revenue to take the risk with you.

tim

Tim - thanks for puting it in Black & White so clearly.

I still think it is UNFAIR and fall into "unreasonable" Terms & Conditions (The Law is an Ass) category.

ZoppZ

[tim123]

I understood 1st part of the agrument but not the second. I can't find the funding without giving away best part of my company so I go out, earn money, invest it, work 12-14 hours per day... only to find that I might be taxed... UNFAIR .

There is got be way around this. How can I show that I am investing and reap the long term benefits? Any ideas, hints, tips welcome.

The Governemt is saying that you can't do this.

I.e. you can't divert the tax free earnings from an 'employment' to fund another venture and hence create the opportunity to save some tax if the venture goes tits up (because the lost money would have been paid in tax anyway) or save some tax if it is successful (because the tax regiem is more friendly towards the 'venture' than employment).

You may not like this, but I don't see how you can argue that its unfair, it's the same for everyone (except that 99.9% of the population don't want to do it).

If you need funds to complete a venture, you are expected to find someone other than the revenue to take the risk with you.

tim

[ASB]

ZoppZ,

As a general principle if you have significant asset in your busines then there is precedent to determine that a contractural relationship between your business and a client could *never* be one of employment.

This is fine in the real world. In the IR35 world of course an inferred contract is used which would muddy the waters.

Of course there is no definition of significant. If you are retaining a significant porton of the income for development purposes then even if your contract itself is dodgy this might give you a reasonble proposect of being outside.

[kingshuk]

Any useful tips I will put on the board.

I am just starting off in contracting and have similar plans to develop a product and sell consultancy services around it. Want to keep most of the money the company earns in cash reserve to be used eventually for promotions, ads etc.

So will be very interested to see how your situation is viewed from the tax man's perspective. Will look forward to your post.