Planning for penalties

[Qdos Contractor]

Take a low salary and the rest in dividends is fine and will certainly increase your take home pay. No argument there. But my contention is that you decrease the risk of an investigation if you take a "sensible" salary and preferably make yourco actually operate like a business. Don't ask me what sensible means in this context but a benchmark might be from Qdos who won't offer IR35 insurance where your salary is below £15k p.a.

£15k is the optimum level. The minimum is actually £9.5k.

[BrilloPad]

Regarding taking Divis..

Personally I take one out every 3 months, meanwhile I use 0% credit cards to take the hit in between. I presume a lot of other people operate this way too.

Are there any 0% credit cards left? I thought those offers had all dried up?

[boxman]

Interesting comments from the panel. In my book it's a game.

Taking a small salary and large dividends is perfectly fine but you have to remember that HMRC's crusade against contractors is based on the assumption that contractors don't run proper businesses and could pay a lot more tax (if HMRC can prove they are inside IR35).

Think of it in terms of a burglar. There are five houses in a street. Four of them have burglar alarms and one doesn't. Which house is most likely to be burgled?

There aren't enough tax inspectors to investigate every person or business and just like the rest of us HMRC has tax take targets for its inspectors. So they are going to go for the quick win easy pickings.

Take a low salary and the rest in dividends is fine and will certainly increase your take home pay. No argument there. But my contention is that you decrease the risk of an investigation if you take a "sensible" salary and preferably make yourco actually operate like a business. Don't ask me what sensible means in this context but a benchmark might be from Qdos who won't offer IR35 insurance where your salary is below £15k p.a.

Agreed, taking salary is effectively paying IR35 it doesn't have to apply to anything like 95% of your turnover. There is a large area of middle ground out there!

[Ardesco]

No we didn't. That's the marginal rate that you pay on the slice above the Higher Rate.

You will pay a less on the lower rate, and nothing at all on the first 5.5K, the 5% deduction and all of your allowable expenses.

Saving more than 40% of total billing is silly. Edit - of course you don't put away 20% because the first 20% will be paid in CT, so you save up the 20% difference - silly me.

Go to ir35calc and try out some figures

tim

Yes you do pay less on lower rate but assuming a company income of £100,000 a year if you were IR35 caught those figures are correct. If you aren't at least bringing in £60,000~ you won't need to be VAT registered anyway so it's a fairly valid assumption.

That 60% will cover the following:

VAT
Employer's NI
Employee's NI
Tax (22% and 40%)
Savings for Interest/Fines if you are caught.

It is not an exact number, but a reasonable estimate.

[tim123]

Regarding taking Divis..

Personally I take one out every 3 months, meanwhile I use 0% credit cards to take the hit in between. I presume a lot of other people operate this way too.

I hope not.

What are you going to do when you hit a lean patch and can't get a job for a couple of months?

As someone with insecure income, you should be using the dividend to fund future spending, not to pay off past loans.

tim

[tim123]

think we worked out on another thread that inside IR35 your tax/NI liability would be in the region of 47%-49%~ after VAT had been taken off

No we didn't. That's the marginal rate that you pay on the slice above the Higher Rate.

You will pay a less on the lower rate, and nothing at all on the first 5.5K, the 5% deduction and all of your allowable expenses.

Saving more than 40% of total billing is silly. Edit - of course you don't put away 20% because the first 20% will be paid in CT, so you save up the 20% difference - silly me.

Go to http://calculator.contractoruk.com/ and try out some figures

tim

[MickeyP]

[QUOTE=Ardesco;439847]If you take the money out as salary you are in effect paying IR35 anyway. What you are effectively saying is "the way to make sure you are not IR35 caught is pay IR35".QUOTE]

[nullfork]

Regarding taking Divis..

Personally I take one out every 3 months, meanwhile I use 0% credit cards to take the hit in between. I presume a lot of other people operate this way too.

[nullfork]

Good question but perhaps a different perspective might help here...

The chances of getting and IR35/PAYE audit are low. The higher the salary you pay to yourself IMHO the less chance reduces again. This is purely because there are bound to be a lot of people out there paying almost nothing and so look more attractive to HMRC to attack. Also, a higher salary means that any tax take opportunities for HMRC are lower.

Agreed, personally I pay myself an 11k salary, but would consider increasing it if necessary.

Get your contracts/working practices professionally reviewed. This will give you a professional opinion as to your IR35 status. B&C and Qdos (amongst others) provide this service.

Still concerned? Consider IR35 insurance (Qdos do this). Join the PCG and get investigation insurance to cover fees for defending yourself in the event of an HMRC investigation.

Yeah, I've had it reviewed and also have IR35 insurance, am also considering joining the PCG. I am however very paranoid about Hector, and since there is a legal requirement for PCG (or any membership based company) to hand over their member list (which would include Ltd. company names); what's to stop Hector getting this list? Don't wish to scare people by making that comment, I probably watch too many episodes of Spooks ;-)

Maximise pension contributions. This is a genuine tax beater but not to everyone's liking.

Yeah, this is something I've been thinking of. I presume since the pension is taken out before tax, then should it come to an IR35 enforcement they couldn't get their hands on it..

Personally, I pay a sensible salary plus an end of year bonus (PAYE), pension contributions of 100% of P60 (from myco) and the rest as dividends. I also get all of my contracts reviewed and have IR35 and tax investigation insurance as well as PI/EL/PL insurance. Total annual cost for this lot is about £1000 and is deductible for CT. I also have a £500 advertising budget, dedicated website and substantial assets on myco balance sheet.

As usual with most things in life it's 90% about perception I reckon.

HTH

Rob

Yeah, some valid points there - thanks for the input

[NotAllThere]

If you take the money out as salary you are in effect paying IR35 anyway. What you are effectively saying is "the way to make sure you are not IR35 caught is pay IR35".

If you want to do that that's up to you, but there is nothing wrong with taking a token salary of £5000 and pulling the rest out of the company as dividends. You are paying 20% CT on all your profits anyway so it's not like HMRC aren't getting any tax from you...

He said he takes "the rest as dividend". And while there may be nothing wrong with a specific practice, it can increase your risk.

[Ardesco]

Good question but perhaps a different perspective might help here...

The chances of getting and IR35/PAYE audit are low. The higher the salary you pay to yourself IMHO the less chance reduces again. This is purely because there are bound to be a lot of people out there paying almost nothing and so look more attractive to HMRC to attack. Also, a higher salary means that any tax take opportunities for HMRC are lower.

Get your contracts/working practices professionally reviewed. This will give you a professional opinion as to your IR35 status. B&C and Qdos (amongst others) provide this service.

Still concerned? Consider IR35 insurance (Qdos do this). Join the PCG and get investigation insurance to cover fees for defending yourself in the event of an HMRC investigation.

Maximise pension contributions. This is a genuine tax beater but not to everyone's liking.

Personally, I pay a sensible salary plus an end of year bonus (PAYE), pension contributions of 100% of P60 (from myco) and the rest as dividends. I also get all of my contracts reviewed and have IR35 and tax investigation insurance as well as PI/EL/PL insurance. Total annual cost for this lot is about £1000 and is deductible for CT. I also have a £500 advertising budget, dedicated website and substantial assets on myco balance sheet.

As usual with most things in life it's 90% about perception I reckon.

HTH

Rob

If you take the money out as salary you are in effect paying IR35 anyway. What you are effectively saying is "the way to make sure you are not IR35 caught is pay IR35".

If you want to do that that's up to you, but there is nothing wrong with taking a token salary of £5000 and pulling the rest out of the company as dividends. You are paying 20% CT on all your profits anyway so it's not like HMRC aren't getting any tax from you...

[boxman]

Good question but perhaps a different perspective might help here...

The chances of getting and IR35/PAYE audit are low. The higher the salary you pay to yourself IMHO the less chance reduces again. This is purely because there are bound to be a lot of people out there paying almost nothing and so look more attractive to HMRC to attack. Also, a higher salary means that any tax take opportunities for HMRC are lower.

Get your contracts/working practices professionally reviewed. This will give you a professional opinion as to your IR35 status. B&C and Qdos (amongst others) provide this service.

Still concerned? Consider IR35 insurance (Qdos do this). Join the PCG and get investigation insurance to cover fees for defending yourself in the event of an HMRC investigation.

Maximise pension contributions. This is a genuine tax beater but not to everyone's liking.

Personally, I pay a sensible salary plus an end of year bonus (PAYE), pension contributions of 100% of P60 (from myco) and the rest as dividends. I also get all of my contracts reviewed and have IR35 and tax investigation insurance as well as PI/EL/PL insurance. Total annual cost for this lot is about £1000 and is deductible for CT. I also have a £500 advertising budget, dedicated website and substantial assets on myco balance sheet.

As usual with most things in life it's 90% about perception I reckon.

HTH

Rob

[Ardesco]

Generally speaking you should be putting 32%~ of the money coming into your company aside anyway to cover your VAT and CT. I think we worked out on another thread that inside IR35 your tax/NI liability would be in the region of 47%-49%~ after VAT had been taken off So if you put away 58%~ of the money that comes into your company that should cover VAT and Tax/NI if you are IR35 caught. Round it up to 60% to account for possible fines?

[nullfork]

Can anyone tell me the calculations, or point me in the correct direction, for determining how much the IR would want back from you presuming a successful IR35 "win" against you?

I know they want all Tax and NI back as well as 7% APR but what about penalties. I understand the penalties to be % based, but a percentage of what? The Tax/NI or the interest?

I'm wondering how much to stick away in a high interest high notice account in case the inevitable happens!!