Reply to: IR35 tax loss insurance - yes or no?

[ASB]

There a director for crying out loud. It is in the job description.

No it isn't. As you go on to say. Keyword is likely.

If a director does not know the likely liabilities of his company then he is failing in his legal duties in that position, especially if the same director then goes on to pay a dividend and the money owed is no longer in the company because it is in the director's pocket!

True. But the point is likely. If he can show that his belief that he was outside IR35 was reasonable then he did know the likely liabilities. It just happens that he was later proved wrong by particularly technical legal argument - way beyond the remit of what is expected.

The debt transfer rules only applies to MSC's. With an MSC they have to pay NI/Income tax on all the income regardless of their status under IR35 - because MSC's have been removed from the scope of IR35. They are treated as caught anyway.

Yes. And the reason for it is because it was ascertained that there were no powers held by HMRC which allowed them to transfer the debt to a seperate legal entity once they discovered/decided the IR35 legislation should have applied. If they could have transferred the debt to the worker (and whatever type of entity they traded under is irrelevant by HMRC own implicit admission by use of the word different) don't you think they might have had a go?

[zathras]

This is incorrect unless HMRC can prove that the director know the company was caught by IR35 which is wholly unlikely.

There a director for crying out loud. It is in the job description.

If a director does not know the likely liabilities of his company then he is failing in his legal duties in that position, especially if the same director then goes on to pay a dividend and the money owed is no longer in the company because it is in the director's pocket!

The debt transfer rules only applies to MSC's. With an MSC they have to pay NI/Income tax on all the income regardless of their status under IR35 - because MSC's have been removed from the scope of IR35. They are treated as caught anyway.

In a PSC. If they paid too much salary it would not matter. Salary is deducted before the Calculation of profit and is more than the tax due on CT anyway.

[ASB]

While I would agree, IR35 is imposed on a body corporate. The debt transfer rules are only relevent with MSC's. (although at the rate things are going there will not be any MSC's for it to be imposed upon).

A PSC Caught for IR35 would be out of scope for the Debt Transfer Rules. There are no problems in transferring the debt, since any director who had been found to be complicit in avoiding NI/Income tax would be liable anyway.

Read the last sentence of 1.10. The simple fact that the companies was a seperate legal entity stymied it.

Now, I think the argument goes that HMRC simply did not have the power to transfer the debt (even under IR35 legislation) - unless it was wilful. Thus taking reasonable advice as to IR35 status etc and defending your corner the liablility ain't going to get transferred.

Yes I know is nominally personal but it is initially levied to the body corporate. Now I must admit that I had previously though that it was possible to transfer the tax (but always was sceptical about the NI and very sceptical about ER's NI). Given the introduction of the transfer of debt provisions and the wording is the linked document I am also sceptical about the ability to transfer the tax under most, if not all, circumstance.

[THEPUMA]

While I would agree, IR35 is imposed on a body corporate. The debt transfer rules are only relevent with MSC's. (although at the rate things are going there will not be any MSC's for it to be imposed upon).

A PSC Caught for IR35 would be out of scope for the Debt Transfer Rules. There are no problems in transferring the debt, since any director who had been found to be complicit in avoiding NI/Income tax would be liable anyway.

This is incorrect unless HMRC can prove that the director know the company was caught by IR35 which is wholly unlikely.

[zathras]

I have read many posts on here from people advising that contractors operating through their Limited should pay themselves NMW to help avoid a HMRC enquiry...would it not be cheaper to take insurance for both investigation costs and tax pay-back and then just pay salary of £5k?

I think I am IR35 friendly but it seems impossible to be sure and I'm not keen on risk...so therefore should I load up with Insurance and tell Gordo to do his worst...or should I pay NMW and hope that this reduces the risk of him coming knocking on my door...

More importantly, the amount you pay in salary can effect the amount you can pay into a pension. Consider if the company pays into a pension this comes out from any Deemed Salary Payment and CT. It is therefore a rather good way of deferring any tax due until you are a pensioner!

[zathras]

Read point 1.10 of the attached link. The whole reason for the new debt transfer rules was that HMRC were unable to collect from the director/shareholder.

http://www.hm-treasury.gov.uk/media/...0207_pu185.pdf

It is the company's responsibility to determine its IR35 status. An individual does not have an IR35 status.

While I would agree, IR35 is imposed on a body corporate. The debt transfer rules are only relevent with MSC's. (although at the rate things are going there will not be any MSC's for it to be imposed upon).

A PSC Caught for IR35 would be out of scope for the Debt Transfer Rules. There are no problems in transferring the debt, since any director who had been found to be complicit in avoiding NI/Income tax would be liable anyway.

[Lewis]

Try Gina Ford.

Doh! Non accountancy advice. I'm an MSC Provider.

[Lewis]

Lewis - care to name this £250/yr insurance? Sounds cheap.

QDOS - very well known insurer of IR35 www.qdosconsulting.co.uk. Their products are:

(1) Freelancer Tax Protection (£99), gives you advice line, contract reviews and defence against S660, IR35, PAYE etc.. similar to PCG offering.

(2) TLC35 + Club membership (£366), as above but with tax-loss, interest and penalties paid in event of IR35 loss.

Hence, tax loss is around £250 on top of legal fees insurance.

[THEPUMA]

Thanks, very helpful answer. Although with a new baby in the house I don't any get sleep anyway

Try Gina Ford.

Doh! Non accountancy advice. I'm an MSC Provider.

[Lewis]

Mainly because the cost is negligible compared to the value of sleep.

Thanks, very helpful answer. Although with a new baby in the house I don't any get sleep anyway

[Zorba]

Lewis - care to name this £250/yr insurance? Sounds cheap.

[THEPUMA]

THEPUMA, you seem very knowledgable and helpful. What is your take on tax loss insurance? I believe I am outside IR35 and have had an independent contract review which agrees. I have taken out IR35 legal fees and tax loss insurance, all of which can be cancelled with a pro-rate refund. I 100% want the legal fees cover but am suddenly not so sure about tax loss part. Is it so unlikely I will have to claim on tax loss to be not worth paying for (£250 p/yr) or are there any other relevant points you can think of? Many Thanks Lewis

Why thank you. My take is this:-

Generally insurance is a gamble with the odds stacked against you (so that the insurance company makes money). I am therefore anti-insurance generally unless I need to have it by law (eg car insurance) or the consequences are distastrous (eg home buildings insurance, life insurance etc).

With IR35 tax loss insurance, based upon the stats previously illustrated, the profit margin to the insurer is even higher than for "general insurance".

So are the consequences dire enough to warrant paying this premium? Well not if you are drawing every penny from the company (again as per earlier posts). But if you aren't, and there is say £20K pa additional tax at stake and you will sleep better at night if you pay the insurance at a cost of £250 pa (I think was quoted earlier) then I would consider it. Mainly because the cost is negligible compared to the value of sleep.

[Vito]

HMRC can only recover taxes from an employee if the employee knew that their employer had wilfully failed to deduct tax when the payments were made. I think HMRC have found that IR35 is sufficiently ambiguous that that burden of proof has been unenforceable.

However, if you did it part way through an IR35 investigation, that may be pushing your luck and as I said earlier, notwithstanding the above, there are strong tax incentives to leave surplus cash in the company.

So...assuming that I am not lucky enough to be able to afford leave cash in my company (or prefer to invest it elsewhere), and as such remove it via quarterly dividends...and assuming that my Accountant and Tax Specialist has advised me that my current contract is IR35 friendly (and as such consider my 'employer' to be acting correctly in the issue of dividends)...and assuming I have taken out insurance to cover the cost of any investigation...then I am safe from having to pay back any money resulting from a lost case?

I am in no way endorsing this as a tax dodge (as I said, I am assuming in this scenario that reasonable lengths have been gone to in order to ensure the contract is IR35 friendly and that the company is acting correctly) but it does remove some of the worry that one day the tax man could come knocking on my door and take 'my house'...lets face it, over a period of 6 years (which I seem to think is the amount of time they can go back over) it could be a significant hit and given the ambiguous nature of IR35 it could happen to innocent folk.

[Lewis]

HMRC can only recover taxes from an employee if the employee knew that their employer had wilfully failed to deduct tax when the payments were made. I think HMRC have found that IR35 is sufficiently ambiguous that that burden of proof has been unenforceable.

However, if you did it part way through an IR35 investigation, that may be pushing your luck and as I said earlier, notwithstanding the above, there are strong tax incentives to leave surplus cash in the company.

THEPUMA, you seem very knowledgable and helpful. What is your take on tax loss insurance? I believe I am outside IR35 and have had an independent contract review which agrees. I have taken out IR35 legal fees and tax loss insurance, all of which can be cancelled with a pro-rate refund. I 100% want the legal fees cover but am suddenly not so sure about tax loss part. Is it so unlikely I will have to claim on tax loss to be not worth paying for (£250 p/yr) or are there any other relevant points you can think of? Many Thanks Lewis

[THEPUMA]

Just read link ... points 1.10 and 1.11 - so does that mean in the new MSC world, that if you are not an MSC you can just close down in the event of a potential IR35 loss to avoid paying tax? Surely that's too easy!

HMRC can only recover taxes from an employee if the employee knew that their employer had wilfully failed to deduct tax when the payments were made. I think HMRC have found that IR35 is sufficiently ambiguous that that burden of proof has been unenforceable.

However, if you did it part way through an IR35 investigation, that may be pushing your luck and as I said earlier, notwithstanding the above, there are strong tax incentives to leave surplus cash in the company.