Reply to: Can Taxman get money removed from company

[VectraMan]

The extra "tax" due on the Dividend will actually be NI.

Good point.

I wonder if Dragonfly had 99k lying around in the business account or not? Will be interesting to know what the next part of that story is (poor sod)

Wasn't it more like £30K? IIRC the £99K was the total tax bill, and he would have paid £60-odd K as CT already.

[THEPUMA]

We've gone through this in some detail in the past (see http://forums.contractoruk.com/accou...5-loses-appeal).

A dividend does not become retrospectively illegal if it was legal at the time it was declared. So, if you make £10K profit after tax one month and pay a dividend of £10K (assuming accumulated reserves brought forward are nil), the fact that you make a loss the following month doesn't make the original dividend illegal.

The case referred to on the link is materially different circumstances than we are talking about here as the company was making a loss at the time the dividends were paid and therefore the directors were negligent in paying the dividend.

This issue is one of the major drivers for HMRC bringing in the third party debt transfer rules as part of the MSC legislation, as they had been unable to enforce collection of IR35 liabilities from clients of Giant etc even where they had established that IR35 should have applied.

[Jubber]

Many thanks Tim - that'll do for me.

I wonder if Dragonfly had 99k lying around in the business account or not? Will be interesting to know what the next part of that story is (poor sod)

[tim123]

I'm saying they don't need to claw back anything from you directly. They just don't grant you the dividend tax break on the money you've earned and you get some extra tax on your SA account.

.

The extra "tax" due on the Dividend will actually be NI.

They can't reclaim this simply be reassessing your Tax return.

That is the problem here

tim

[tim123]

Is that your opinion or are you qualified to answer the question? I agree with what you are saying, but is it enough reasonable care? I think it would be for a judge, but I doubt if it would be enough for Hector.

I said that it was the absolute minimum required.

This still leaves the possibility of Hector wanting more

tim

[QwertyBerty]

I've never paid for a review, but I have read the guides and looked at the contract and used my brain to judge that the terms of the contract put me outside IR35 according to the best advice from the PCG. Is that not reasonable care?

Agreed, same here. I also keep all the emails to agencies requesting changes to the contract which I hope shows I actually read the thing and have some clue about IR35. I also ask the client when I leave to sign a piece of paper to say I worked independently as a consultant and so forth.

QB.

[Jubber]

You might be better off just coughing up.

Nope - never. If I am outside of IR35 I wouldn't.

I suppose all this has to come down to how the business actually feels about each contract. I will stick to my guns if I feel I am correct. I had a PAYE review back in 2004 and it was a breeze. Unless things have changed radically I'll keep running my business the way I feel it should be run if, and only if, I have the correct paperwork to back up my decisions. That to me is reasonable care.

My advice (IMHO) to the OP is make sure you have the paperwork to prove your IR35 status and spend your money.

[alf13]

hello, thanks for the replies.

seems to me that there is clearly confusion and uncertainty, as with every part of this legislation, with one accountancy firm sjd, advising one point of view and another (i use hillier hopkins) advising the opposite.

i fail to see how any of us can comfortably operate within the rules (whether outside or inside ir35) when they are so unclear and open so such different interpretations.

it is most frustrating that we have to live our lives running the gauntlet with the taxman the whole time. surely the presumably intelligent people that come up with these rules can do a better job of it.

anyhow i will have a better read through tomorrow and see it it all makes more sense.....

cheers

[VectraMan]

Now I'm confused. The money is owed by the company. The tax is on a deemed salary. We have already done that to death elsewhere. The company owes the money not an individual.

No argument there, but what I'm saying is that if the dividends aren't allowed, you'll have to pay the full amount of income tax which amounts to the same thing as paying IR35'd tax. HMRC hold all the cards in that respect: they can re-evaluate your previous SA returns in light of new evidence.

As well as all that, if the company doesn't have the money that doesn't mean they'll give up. It might mean that the company has to work to pay off HMRC over time. And if you instead go bankrupt with unpaid tax liabilities, then you might find a dim view is taken of you starting up a new company doing exactly the same thing. Same if you close down a company after a contract and start another: HMRC can say that closing the company was only a mechamism to avoid a possible tax liability, and they'd be right.

So even if this approach did work, you might find it hard to carry on as a Ltd. company contractor. You might be better off just coughing up.

[Jubber]

Huh?

Now I'm confused. The money is owed by the company. The tax is on a deemed salary. We have already done that to death elsewhere. The company owes the money not an individual.

I was talking about there not being enough money in the company to meet the new amount of tax owed by the company say after an IR35 review.

Take this as an example

Say my company now owes 60k in tax and other sundries after a PAYE review for years 2003/2004,2004/2005. There is no money in the company to pay this as the money has been distributed to the shraeholders. At the time of distribution reasonable care was taken and there is NO negligence. I say if Hector took my company to court (bankruptcy) then persued so called 'debtors' (please see the link I gave above) the judge would not allow it because at the time of distribution there was reasonable care and no negligence (contracts in place pointing to outside IR35)

Sorry if this strays a bit from the OP question.

[BrilloPad]

I hope I'm wrong, but I would be suprised if there was such an obvious loophole.

WHS - summarises exactly what I have been thinking

[VectraMan]

Yes - but what we're discussing is after that. Whether they can claw the money back from you directly.

I'm saying they don't need to claw back anything from you directly. They just don't grant you the dividend tax break on the money you've earned and you get some extra tax on your SA account.

The onus is then on you to prove that you're not liable for that tax, which might be a bit hard having had the IR35 case go against you. It's not about whether you're entitled to keep the dividend money (which you should be if you'd taken reasonable care etc.), but what tax rate you should pay on that income. And tax on dividends isn't the company's responsibility, it's yours from your SA return.

The link above talks about illegal dividends paid when a company isn't making money, which you can see is an issue if the company subsequently goes bankrupt, and it seems right and fair that shareholders should repay those dividends to pay off any creditors. What we're talking about here is entirely different.

I hope I'm wrong, but I would be suprised if there was such an obvious loophole.

[Jubber]

But I agree with Simon from SJD: they'll just reclassify your dividends. I don't see how it matters what you did. It's essentially nothing to do with the company: you've been paid money and because you're not entitled to the tax breaks you get for dividends, you haven't paid the right amount of tax on it.

Yes - but what we're discussing is after that. Whether they can claw the money back from you directly. There was a judgement saying that if there was not 'reasonable care' taken, then they can. What is reasonable care? If you take reasonable care, then they can't.

[Jubber]

It's certainly the minimum you need if you want to avoid having the tax reassessed from your bankrupt company to you personally.

Which I think is the question in this thread

tim

Is that your opinion or are you qualified to answer the question? I agree with what you are saying, but is it enough reasonable care? I think it would be for a judge, but I doubt if it would be enough for Hector.

[VectraMan]

I agree. If I just say I am outside IR35, that is not 'reasonable care' at all. What is the level we need to take it to to achieve reasonable care? If Hector tells me the reasonable level, I will run my company accordingly.

I've never paid for a review, but I have read the guides and looked at the contract and used my brain to judge that the terms of the contract put me outside IR35 according to the best advice from the PCG. Is that not reasonable care?

But I agree with Simon from SJD: they'll just reclassify your dividends. I don't see how it matters what you did. It's essentially nothing to do with the company: you've been paid money and because you're not entitled to the tax breaks you get for dividends, you haven't paid the right amount of tax on it.