Reply to: IR35 Insurance as business expense

[manstein]

I thought that if you were a director of a company and it went bankrupt then you couldn't be a director again for a period of time, or am I just thinking about personal bankruptcy?

If it's the case that you can be a director of company after company then I also don't see why anyone would pay the tax if they were caught by IR35.

I was always under the impression if I was caught by IR35 (I don't think I would be, but never can be sure) then the government could come after my house, etc. but thinking about that it doesn't make sense as I'm sure no director from Lehman's Brothers was sleeping in the street last night.

I would like to learn more about all this and reading these forums are informative but it seems the tax man is either very variable in his decision making or doesn't know one part of his anatomy from another.

If I ever do get an inspection I think I'll offer to initially discuss it with the inspector over lunch and slip in a few fine scotch whiskies!!

[TheFaQQer]

I have tried to understand this for years. If it is just a company liability then why are we so worried about it? If Dragonfly Consulting Ltd doesn't have a spare £99k handy to pay Hector, then why would the victim of the recent case be worried? I struggle to understand it.

That's my thoughts too - if the company hasn't got the money, then so what? I'll just get another one in a few minutes

[Fred Bloggs]

Exactly. I said it was a personal tax. Puma said it was a business liability.

If it was a business liability, then why wouldn't everyone claim to be outside IR35, and when they are caught, empty the bank account and let the limited company go bust? If IR35 is a company liability, then this way the employee / director gets the money and doesn't pay the tax because the company can't pay it. If IR35 is a personal liability, then this makes no difference since it's nothing to do with the company.

My (implied) answer was that they wouldn't / couldn't because it's nothing to do with the company, it's a personal tax.

If Puma is right, which he/she may well be, then why is no-one using this method of paying the tax??

I have tried to understand this for years. If it is just a company liability then why are we so worried about it? If Dragonfly Consulting Ltd doesn't have a spare £99k handy to pay Hector, then why would the victim of the recent case be worried? I struggle to understand it.

[THEPUMA]

Exactly. I said it was a personal tax. Puma said it was a business liability.

If it was a business liability, then why wouldn't everyone claim to be outside IR35, and when they are caught, empty the bank account and let the limited company go bust? If IR35 is a company liability, then this way the employee / director gets the money and doesn't pay the tax because the company can't pay it. If IR35 is a personal liability, then this makes no difference since it's nothing to do with the company.

My (implied) answer was that they wouldn't / couldn't because it's nothing to do with the company, it's a personal tax.

If Puma is right, which he/she may well be, then why is no-one using this method of paying the tax??

It is possible you would get away with doing what you suggest. If the bank account was emptied after it became apparent that you were caught by IR35, there is some anti-avoidance legislation that could be applied.

There would be a bit of a dilemma at the beginning of an investigation if you are unsure whether or not the challenge will be successful in that if you declare a dividend then, it may be subject to 25% personal tax as opposed to 10% if entrepreneurs' relief were claimed on a liquidation of the company.

This is also a reason why you wouldn't want to draw every penny out of the company in dividends on an arising basis.

PUMA

[TheFaQQer]

Am I missing something or does that not answer your own question? If you empty your business account to prevent further liability/ability to pay would that not imply that it's a company liability?

Exactly. I said it was a personal tax. Puma said it was a business liability.

If it was a business liability, then why wouldn't everyone claim to be outside IR35, and when they are caught, empty the bank account and let the limited company go bust? If IR35 is a company liability, then this way the employee / director gets the money and doesn't pay the tax because the company can't pay it. If IR35 is a personal liability, then this makes no difference since it's nothing to do with the company.

My (implied) answer was that they wouldn't / couldn't because it's nothing to do with the company, it's a personal tax.

If Puma is right, which he/she may well be, then why is no-one using this method of paying the tax??

[Ravello]

So why is the first course of action, when you are being investigated, to take all the cash out of the business as a dividend and to bankrupt the company, before setting up again??

Am I missing something or does that not answer your own question? If you empty your business account to prevent further liability/ability to pay would that not imply that it's a company liability?

[TheFaQQer]

And incidentally, I must correct again those above who are saying that IR35 is a personal tax. It isn't. It is a company liability.

PUMA

So why is the first course of action, when you are being investigated, to take all the cash out of the business as a dividend and to bankrupt the company, before setting up again??

[Sausage Surprise]

You don't get it for free.

Your account balance is £10,000.

You pay £500 for insurance leaving £9500 in your account.

You then pay 21% corporation tax on this £9500 (your company profit).

It is not 100% paid from corporation tax, this is a common misconception that many people seem to have. In real terms you basically get it 'tax free', so you save ~21%.


I worked with a colleague who was with an umbrella and said he was claiming £200 a week in petrol, he actually thought he was £200 better off every week and that doing more miles made him rich. Even after explaining to him how it worked he still thought he was better off doing lots of miles and that it was a license to print money.

Ditto, except my colleague was racking up large bills for business lunches and evening meals on the way home

[THEPUMA]

It is debatable whether it is allowable or not. The insurance companies normally suggest it is and I think that HMRC have stated that it isn't. I think on balance my opinion is that it isn't.

Broadly, if you incur an expense defending a tax investigation which is ultimately fruitless, then those costs are tax-deductible. On the other hand, if the investigation is successful, the costs are not tax-deductible.

The insurance premium covers both these two scenarios and since there is "duality of purpose", the overall expense is not allowable, in my opinion.

And incidentally, I must correct again those above who are saying that IR35 is a personal tax. It isn't. It is a company liability.

PUMA

[manstein]

Thanks for the explanations, and I was under the misconception that if I had a corporation tax bill of £10,000 I could say that I had £2,000 of expenses and just give the tax man £8,000.

Now that I think about it it makes perfect sense that it should come out of the gross and I understand it now.

Yes, I was confused that it was an insurance that covered a personal tax so I thought the taxman could argue that because I was personally covering my personal tax bill that it wouldn't be an insurance for my business but, as ratewhore pointed out, unless you had a business you wouldn't need it in the first place.

Thanks again.

[TheFaQQer]

If you're asking whether you can pay it from the business or not, then the answer is yes. Given that you would not personally need to buy that insurance unless you were running a Ltd Co. I buy mine through my Ltd without a second thought.

All IMHO of course...

But IR35 is a personal tax, rather than a business tax, so I can understand the question.

That said, I claim mine (and rely on the insurance to pay out if I do anything wrong in an expenses enquiry )

[BolshieBastard]

If you're asking whether you can pay it from the business or not, then the answer is yes. Given that you would not personally need to buy that insurance unless you were running a Ltd Co. I buy mine through my Ltd without a second thought.

All IMHO of course...

Exactly. The TLC35 insurance is just like any other business insurance ie PL, PI etc so is an allowable expense.

[ratewhore]

Hi all,

I am considering taking out QDOS's TLC35 insurance, which I believe will cover my tax bill should I be found to be caught by IR35. I have searched the web high and low about whether I can offset the full cost of this as a business insurance against my corporation tax bill or does this money come out of my own pocket?

If it is a wholly refundable expense I can't understand why everyone wouldn't have it, as you're getting it for free?

Or is there something I'm not seeing, I just don't want to claim an expense for something that may not be allowable and draw attention to myself.

Has anyone any advice to offer on this, from either personal or professional experience?

Cheers

If you're asking whether you can pay it from the business or not, then the answer is yes. Given that you would not personally need to buy that insurance unless you were running a Ltd Co. I buy mine through my Ltd without a second thought.

All IMHO of course...

[expat]

I worked with a colleague who was with an umbrella and said he was claiming £200 a week in petrol, he actually thought he was £200 better off every week and that doing more miles made him rich. Even after explaining to him how it worked he still thought he was better off doing lots of miles and that it was a license to print money.

Where did he think the money came from, the Tooth Fairy? All the money is yours in the first place, you just pay more or less tax on it.

[expat]

Hi all,

I am considering taking out QDOS's TLC35 insurance, which I believe will cover my tax bill should I be found to be caught by IR35. I have searched the web high and low about whether I can offset the full cost of this as a business insurance against my corporation tax bill or does this money come out of my own pocket?

If it is a wholly refundable expense I can't understand why everyone wouldn't have it, as you're getting it for free?

Or is there something I'm not seeing, I just don't want to claim an expense for something that may not be allowable and draw attention to myself.

Has anyone any advice to offer on this, from either personal or professional experience?

Cheers

You can't offset anything against tax. All you can do, where allowed, is offset something from the taxable amount.