Reply to: When to pay salary?

[Bluebird]

It's like me saying that a horse is a sheep because it has 4 legs and every sheep I've ever seen has 4 legs.

You didn't visit North Wales the spring after Chernobyl then....

[THEPUMA]

Perhaps Malvolio and I had the same accountant at one time.

If you read carefully, you'll see that Malvolio did not connect regular payment with IR35. His opinion and mine, is that with regular dividends, there is a risk that the taxman will say that they were not divvies, they were salary, and therefore are liable to NI payments. As I said, this opinion I've held since the 90s, before IR35 was twinkle in Gordon's eye.

Maybe the law has changed, maybe cases never got to court. Maybe the application requires some other criteria to be filled.

I've definitely heard, and agree that regular payments of dividends have zero bearing on your IR35 status. I've not seen anything that says this other attack isn't a possibility. Perhaps puma would be so kind as to provide a link?

I am unable to back up my opinion with any links, but it is not based solely on what IAS said 13 years ago. Unfortunately, I really cannot recall where else I've seen this. Perhaps an old edition of Freelance Informer? I'd certainly like to see this settled definitively. I'd be most happy to proved wrong - though I'd really like to know where my information came from!

It is difficult to come up with a reliable link that says that something is not correct. As a flippant example, you would be lucky to find a link that says that the current corporation tax rate is not 73.2%.

If you trawled the various contracting sites, you may find an opinion one way or another, but that would be unreliable.

One point that I guess is vaguely relevant is that some HMRC Inspectors may argue that an undocumented dividend should be treated as salary (probably incorrectly). But that argument could be raised whether payments were made monthly or annually.

If dividends are documented properly, it is not up to HMRC to magically change them from a dividend to a salary. If the directors have a meeting and decide to pay a dividend and that dividend is paid to the shareholders as per the minute of the meeting, then there is no way HMRC can turn around and say that that payment is a salary, because it simply isn't.

It's like me saying that a horse is a sheep because it has 4 legs and every sheep I've ever seen has 4 legs.

[hugebrain]

Thanks

OK. So I'll pay the 10 grand next month and save myself £100. Cool.

[THEPUMA]

I'm still not sure what this means. If the tax goes up in April does and my Company year ends in November, does that mean I pay two different tax rates depending on what part of the year I was paid?

In practise you will time-apportion your profits. So as your year end is in November, for the year ended 30/11/08, 4/12 of your year's profits will be taxed at 20% and 8/12 of your year's profits will be taxed at 21%.

So effectively your £10K salary payment will get tax relief at [20% x 8/12 + 21% x 4/12] 20.3333% if it is paid on 01/12/07.

If paid in y/e 30/11/07, the tax relief will be at [19% x 8/12 + 20% x 4/12] 19.3333%.

[NotAllThere]

Perhaps Malvolio and I had the same accountant at one time.

If you read carefully, you'll see that Malvolio did not connect regular payment with IR35. His opinion and mine, is that with regular dividends, there is a risk that the taxman will say that they were not divvies, they were salary, and therefore are liable to NI payments. As I said, this opinion I've held since the 90s, before IR35 was twinkle in Gordon's eye.

Maybe the law has changed, maybe cases never got to court. Maybe the application requires some other criteria to be filled.

I've definitely heard, and agree that regular payments of dividends have zero bearing on your IR35 status. I've not seen anything that says this other attack isn't a possibility. Perhaps puma would be so kind as to provide a link?

I am unable to back up my opinion with any links, but it is not based solely on what IAS said 13 years ago. Unfortunately, I really cannot recall where else I've seen this. Perhaps an old edition of Freelance Informer? I'd certainly like to see this settled definitively. I'd be most happy to proved wrong - though I'd really like to know where my information came from!

[malvolio]

Can someone from a reputable accountancy firm please verify this?

(no offence to Malvolio or puma )

None taken.

[poser]

Your first post says that paying regular consistent dividends may in some way result in a successful HMRC IR35 investigation, which is plain wrong.

Your second post says that some people might be successfully challenged by HMRC re IR35, although in many previous posts and in this post again you state that this is very unlikely.

Your second post in no way justifies or explains or indeed is in any way relevant to your first post.

And as an aside I think the OP's point was reasonably sensible. Should he pay a salary on one day ands get 20% CT relief or the next day and get 21% CT relief (not quite as simple as that but that's the gist of it).

My answer would be that by delaying the payment by one day, you are deferring the CT relief for a year. So do you want to receive relief of say £10K x 20% = £2K in 9 months or £10K x 21% = £2,100 in 1yr 9 months. It equates to an effective interest rate of 5% so the answer is it doesn't much matter as that's probably what you'll make at the bank.

Can someone from a reputable accountancy firm please verify this?

(no offence to Malvolio or puma )

[malvolio]

I'm still not sure what this means. If the tax goes up in April does and my Company year ends in November, does that mean I pay two different tax rates depending on what part of the year I was paid?

CT is taxed on the rate in force at the end of your company's year, so for Nov 2007 it will be at 20%

[hugebrain]

CT goes up at financial year end (April).

It's already gone up to 20% and will rise to 21% next April, then 22% the year after.

I'm still not sure what this means. If the tax goes up in April does and my Company year ends in November, does that mean I pay two different tax rates depending on what part of the year I was paid?

[THEPUMA]

No, this has been a possibility since way back. I was certainly warned against it by my accountant in the mid 90s.

I'm intrigued. You seem convinced there's no cases. Have you read ALL the law books?

Your accountant was wrong.

I don't need to read all the law books. Had there been such a case, it would have been well-documented. I have spent many years studying tax and never come across one and have heard plenty of highly-respected tax commentators state that this is not the case (and none say that it is).

Do you need to read every book on your area of specialism or can you accept that the several books you have read and the unanimous opinion of various specialists you have heard speak is sufficient to enable you to cite a point confidently?

More importantly, case-law does not override legislation, it clarifies it. And the legislation is not ambiguous. There would need to be specific legislation that says "Oh by the way, you can't pay regular or consistent dividends.". There is no such legislation. In fact, many listed companies pay both regular and consistent dividends. They just pay them annually or bi-annually rather than monthly, weekly or even daily which you could if you chose to.

Another point is that HMRC will probably not even know how frequently dividends are paid by your company until they start an investigation and ask for the company bank statements.

[NotAllThere]

Where on Earth do you get that from? Utter nonsense. No legislative or case-law basis whatsoever. I doubt the PCG agrees either.

No, this has been a possibility since way back. I was certainly warned against it by my accountant in the mid 90s.

I'm intrigued. You seem convinced there's no cases. Have you read ALL the law books?

[THEPUMA]

And thirdly I do hope you're not taking regular, consistent dividends, or Hector may decide they are actually salary and start charging you NIs on it.

If you get investigated and if they decide your dividends are actually a salary, it will be liable for NIs. Equally they might try and stick everything inside IR35, or disallow expenses. All extremely unlikely to happen I agree.

But that wasn't the point, actually, which is that the OP hasn't bothered to find out either way

Your first post says that paying regular consistent dividends may in some way result in a successful HMRC IR35 investigation, which is plain wrong.

Your second post says that some people might be successfully challenged by HMRC re IR35, although in many previous posts and in this post again you state that this is very unlikely.

Your second post in no way justifies or explains or indeed is in any way relevant to your first post.

And as an aside I think the OP's point was reasonably sensible. Should he pay a salary on one day ands get 20% CT relief or the next day and get 21% CT relief (not quite as simple as that but that's the gist of it).

My answer would be that by delaying the payment by one day, you are deferring the CT relief for a year. So do you want to receive relief of say £10K x 20% = £2K in 9 months or £10K x 21% = £2,100 in 1yr 9 months. It equates to an effective interest rate of 5% so the answer is it doesn't much matter as that's probably what you'll make at the bank.

[malvolio]

Where on Earth do you get that from? Utter nonsense. No legislative or case-law basis whatsoever. I doubt the PCG agrees either.

If you get investigated and if they decide your dividends are actually a salary, it will be liable for NIs. Equally they might try and stick everything inside IR35, or disallow expenses. All extremely unlikely to happen I agree.

But that wasn't the point, actually, which is that the OP hasn't bothered to find out either way

[THEPUMA]

And thirdly I do hope you're not taking regular, consistent dividends, or Hector may decide they are actually salary and start charging you NIs on it.

Where on Earth do you get that from? Utter nonsense. No legislative or case-law basis whatsoever. I doubt the PCG agrees either.

[malvolio]

Sorry for not being clear. I usually pay the salary in one lump for convenience and I use up my April-April personal tax allowance each year. This year, the corporation tax is going up (I don't know when), so I was wondering if I should pay the salary out of next year's profits instead of this year's (co. year ends at the end of this month).

Or doesn't it make any difference?

Never ceases to amaze me how people make complex decisions on financial matters to save fourpence without actually knowing the basics of how it all works...

For one thing, you don't pay salary out of profits, they're a cost of doing business and profits are what's left. Secondly, if you have an average kind of turnover you're looking to save around £35. Is it really worth the bother? And thirdly I do hope you're not taking regular, consistent dividends, or Hector may decide they are actually salary and start charging you NIs on it.