Mechanics of an IR35 Investigation

[IR35 Avoider]

HMRC ought to be able to reclaim income tax and employees NI from a worker if they can't get it from the company, as these are personal taxes, but only the employer/company can be held responsible for the employer's NI. However there are restrictions on the circumstances under which they can go after the employee for the employee taxes. I think these restrictions were designed to protect naive employees who don't understand the tax system from unscrupulous employers who fail to make the right deductions. These restrictions were cited in the justification for the MSC legislation. HMRC said they were unable to recover tax from MSC employers or employees under current law, even when it was proven to be due.

[mjshrimpton]

Ex-MSC users - well they've been milking the system and causing political problems for real small businesses, so actually I could care less if they are caught or not!

Yeah - cheeky gits.

Oh.

[malvolio]

Looked at from the perspective of people with a genuine LtdCo it is a personal tax that is paid by the person's company.

That's where the confusion arises, but if you think about it the concept of IR35 is that the company is a sham and is merely a vehicle for receiving monies paid in return for work done. Of course that falls apart as soon as you start to think about people getting caught on only some contracts (even concurrent ones, would you believe) but IR35 is not a logical beast.

Umbrellas users needn't bother. They are employees anyway so there's no argument over IR35 status. They only get into trouble if they start doing clever things to reduce their tax liability, like claim for money they haven't spent, or take out usecured loans. But that's evasion, not IR35.

Ex-MSC users - well they've been milking the system and causing political problems for real small businesses, so actually I could care less if they are caught or not!

[Lewis]

I'm sure I read something on this site about IR35 status being successfully challenged for some clients of an MSCP but that HMRC didn't get any money. I assumed it was because company had been closed down (the MSC not MSCP). The person that posted seemed to be suggesting that was why new MSC legislation was introduced. Anyone know any more?

[Vito]

No. IR35 is a personal tax, not a business one.

There was a recent thread on here that suggested this was not quite as clean cut as you suggest...

IR35 relates to how your company operates...it has to as any contracts are in the name of your company and that is who you are operating on behalf of.

If the company then pays you expenses and a salary/dividend split that is not strictly appropriate then that is your company's lookout and not yours.

My understanding from the previous thread (contributed to by an accountant I believe) is that the company is liable for any additional taxes owed. The exception to this is if the employee (i.e. you) knows (or has good reason to believe) that the company is not operating properly and still accepts the pay structure.

I'm not an expert on this so forgive me if I'm wrong, but I just cannot see how IR35 can be seen as a personal tax...in fact, even if the employee knows the company is operating incorrectly I don't see how it can be a personal tax...although in this case I would expect it to be considered tax evasion which is otherwise known as money laundering these days...and that don't sounds too good!

[Lewis]

i was talking to a provider of insurance about extending the cover for the period I was at an MSC, and he said there was no point for the following reasons

a) the company is now closed and the Revenue’s window of enquiry is 12 months after the statutory filing date of the corporation tax return, which is Jan 2009 which is when the insurance runs out.

b) because you were never a director of the company, the Revenue could not come to you for any PAYE arrears following an Employer Compliance Review.

Looking on companies house my old 'MSC' from Giant which I left over two years ago is not dissolved. In fact it is showing accounts overdue!

[mjshrimpton]

At a tangent to my original thread

i was talking to a provider of insurance about extending the cover for the period I was at an MSC, and he said there was no point for the following reasons

a) the company is now closed and the Revenue’s window of enquiry is 12 months after the statutory filing date of the corporation tax return, which is Jan 2009 which is when the insurance runs out.

b) because you were never a director of the company, the Revenue could not come to you for any PAYE arrears following an Employer Compliance Review.

[malvolio]

No. IR35 is a personal tax, not a business one.

[Lewis]

I think I heard somewhere that if a company is dissolved IR35 can no longer be applied, is that true?

[malvolio]

Depends how you look at it. more pessimistic view is that they now have a list of people who have not been paying approriate PAYE and NICs for some time.

In reality, I suspect the MSC thing won't make a huge difference. It was an otherwise legal anomaly that has been closed off. I doubt they have a real case for backtaxing ex-MSC users. But if any of them don't hit the required quality standard for returns next year they may be in trouble.

[mjshrimpton]

Dangerous to make this assumption I am sure, but will they not have felt they dealt with MSC's through effectively abolishing them, so there might not be the impetus to investigate retrospectively. ( I have heard from an agency that lots of IR35 focused people are now not focused on it any more.......)

So the IR35 insurance (through PCGPlus or elsewhere) kicks in and deals with the advisors fees, and pays for representation at meetings if it gets beyond written communication, leaving with you to deal with a load of paperwork, and the tax if and when you lose. Hmmmmm.

This must therefore take place after at least one set of returns has been filed, so a limited starting In April now needs to be ready and prepared for any investigation 9 months after year end, in sync with their first returns?

[malvolio]

The assumption they make is that there is something wrong with your PAYE records. So they will go through them with a fine toothed comb looking for anything faintly amiss (such as SallyAnne's £11k expenses for working 200 miles from home). They will then move on to your employment status and see if you come under IR35. They will want you to answer some hundred or so largely meaningless questions on each contract you have undertaken over the previous 6 years. That takes about 2-3 years, and will have cost you around £15k in advisors' fees (don't be tempted to do it yourself, you'll lose), taken over your life and left you not knowing if you are about to be hit with a bill for several tens of thousands.

The MSC thing is even more confusing now, since they may decide all your MSC earnings were due full PAYE and NICs regardless. That bit hasn't been tested yet, so I hope you aren't the first.

And they can look at anything they want, they can even quiz your ex-clients even if that damages your credibility.

[mjshrimpton]

I managed one thread without being flamed. So now to test the waters a bit further, and also this fire retardant suit I got cheap ......

Lots of stickies about company formations, and threads about pensions all been very useful, really appreciative of this forum. If there was a tip box.....

I still dont understand how an IR35 investigation really works/starts however.

Like many others I now have a limited to work through, PCGPlus insurance, liability insurances up the wazoo.
So the questions .....

Can a company be investigated before it's first set of accounts has been filed?

It looks like it is a PAYE investigation first, then IR35 status. Is that correct?

Do they then have the right to look at all contracts for that limited over any given period, or is it a specific contract first.

What happens if you have moved from MSC to limited while at same client - given that I was not a director at the MSC, what is my liability if I lose a status enquiry about my limited - can they then start going back in time.

(I am assuming that one of the aspects of the status enquiry will be whether I had previous concurrent contracts at the same client as the contract(s) under investigation.)

I accept all and any abuse for working through an MSC, and therefore not being a 'real' contractor - let's just take that as read.