Reply to: IR35 and corporation tax

[PhilAtBFCA]

The company has been running for a few years already. There's a chance that HMRC might not be entirely convinced that the current contract is outside IR35. So there are two options: Stay on the LTD co and face a possible bill if getting caught. Or switch to umbrella PAYE.

rocsen

Glad you like the spreadsheet :-)

Its not HMRc that have to be convinced at this point, its you. You may be convinced and taken reasonable care to form that opinion, they may agree or diasagree at some point, and thats when its important you have taken reasonable care and got all your proof.

But I dont think you have identified the best right options for you.....

Even if you went Umbrella and closed the company the issue will not go away, although it maybe reduced by the fact that the company is closed. Your personal liability as a director potentially doesnt ever go away even if the company is closed. See here

If you were considering closing company and going umbrella, what would be the difference in closing company and starting a new company ? Nothing really ! You still have the same risks.

To me your options are based on your position in regard to IR35 as follows:-

If you are not convinced you are outside IR35, prepare accounts inside ir35 and paying the tax is the best way forward, and has little risk attached.

If you are convinced, then keep your proof and account for outside ir35.

If you dont know if you are convinced or not, then best get some help or research the position thouroughly, a guide can be found here

Phil

[rocsen]

rocsen

Hi, I cannot see how you could be worse off under a Ltd Co Inside IR35 unless you dont compare like for like.

using this spreadsheet without expenses and assuming your vat registered the Ltd co is better by £1800 a year net, about 5%.

Its not just about the money though !! A Limited Co is OK for people who really want to run their own business, if you dont I would think very carefully before doing it.

Phil

That spreadsheet is brilliant by the way!

Thanks for all your input everyone

[centurian]

Mind you, I think there's a job for you in Orwell's Ministry of Truth if you can say with a straight face that to "restate the accounts" is "not reclassifying last years profits as salary really"

Well of course it amounts to that - I don't think that's in doubt. The deemed payment is just a vehicle to effectively reclassify profits without actually doing so.

Either way it amounts to roughly the same amount (penalities/interest not withstanding), so I wouldn't get too hung on the exact terminology.

Of course the alternative is to pay the tax twice if you'd prefer

[rocsen]

rocsen

Hi, I cannot see how you could be worse off under a Ltd Co Inside IR35 unless you dont compare like for like.

using this spreadsheet without expenses and assuming your vat registered the Ltd co is better by £1800 a year net, about 5%.

Its not just about the money though !! A Limited Co is OK for people who really want to run their own business, if you dont I would think very carefully before doing it.

Phil

The company has been running for a few years already. There's a chance that HMRC might not be entirely convinced that the current contract is outside IR35. So there are two options: Stay on the LTD co and face a possible bill if getting caught. Or switch to umbrella PAYE.

Can we safely say, even if the person got caught, he'd still be better off on the LTD co? According to your spreadsheet, inside IR35 is about 1% better off than Umbrella. But then we need to include penalties/interest fees as well.

Thanks again

[PhilAtBFCA]

rocsen

Hi, I cannot see how you could be worse off under a Ltd Co Inside IR35 unless you dont compare like for like.

using this spreadsheet without expenses and assuming your vat registered the Ltd co is better by £1800 a year net, about 5%.

Its not just about the money though !! A Limited Co is OK for people who really want to run their own business, if you dont I would think very carefully before doing it.

Phil

[rocsen]

Yes I can see what you mean !

Phil

Thanks for all the info. Certainly is a lot to take in.

I sent a reply yesterday morning but it still hasn't gone through. There appears to be a massive delay, so appologies for any duplicate posts.

The contract here is worth roughly £37000 / year. Accounting is not my strong point, but according to a few calculations on i35calc, being caught by IR35 would mean the person would be just slightly worse off than if they were to be on a PAYE umbrella scheme. Is this possible?

[PhilAtBFCA]

Mind you, I think there's a job for you in Orwell's Ministry of Truth if you can say with a straight face that to "restate the accounts" is "not reclassifying last years profits as salary really"

Yes I can see what you mean !

Phil

[expat]

expat

You are not reclassifying last years profits as salary really.

What you could do is restate the accounts to reduce the profits by the costs of the gross deemed payment and employers ni. the practical applicationof this would depend on the year end date(s) affected.

<snip much explanation and detailed example>

Phil

Thanks for the careful explanation. I just couldn't see how it would work, but "restating the accounts" would do it, if that is allowed.

Mind you, I think there's a job for you in Orwell's Ministry of Truth if you can say with a straight face that to "restate the accounts" is "not reclassifying last years profits as salary really"

But thanks again.

[PhilAtBFCA]

Can you really retrospectively classify last year's profit as last year's salary?

expat

You are not reclassifying last years profits as salary really.

What you could do is restate the accounts to reduce the profits by the costs of the gross deemed payment and employers ni. the practical applicationof this would depend on the year end date(s) affected.

The dividend payments received would need to be restated as payments to the worker, in advance of the net deemed payment. It is possible after this is accounted for that the director owes money to the company, i.e. has had too much from the company !

The tax, ers, and ees would be owed by the company to HMRC as it is the company that, under the legislation, should have deducted ees, tax and paid over the ers and calculated the deemed payment. The ees and tax is not owed by the worker as this is a calculation under PAYE ( therfore the liability of the company not the individual)

There is a provision in the legislation that for the workers personal tax purposes reduces the dividend paid by the gross deemed payment, which is actually irrelevant if your restate the accounts.

AIUI the deemed payment itself can not be said to be a cost, whether to the company or to the individual. The tax and NIC on it is a cost.

The point is that the Gross Deemed payment on which Employers NI is charged is deductible in the accounts of the company and reduces its corporation tax bill, and the tax and employees NI is owed to HMRC by the company, and is therefore accounted for in the company accounts.

Here is a reworked example:-

before the DP calculation company looks like this:-


Contract Income £100,000
Salary £50,000 ( on which lets say £14,459.60 paid in EES and tax)
ERS £5667.84
Profit before tax£44,332.16
CT £9309.75
Dividends(net) £35,022.40 ( gross £38913.77)
Retained balance £0

So your gross earnings are:-
£50,000+£38913.77 = £88,913.77
On this earnings tax paid by the company was
ERS £5667.84+CT£9309.75+£14459.60 tax and ee = £29,437.19 and you will owe £8755.60 in Higher Rate Tax
You received net
£35540.40 salary and £35022.40 dividends = £70562.80 less £8755.60 Higher rate Tax = £61,807.20 ( 62 % net income)

Note: If you had used a salary of £5720 instead your net would have been in the region of 71%.


You now have to calculate an inside IR35 scenario

Contract Income £100

ERS on DP £10,131.06
Deemed Payment Gross £84868.94 ( £100 less 5% less £10,131.06 ERS and £28485.86 paid in EES and tax )
Profit before tax £5000
CT £1050
Dividend net £3950 gross £4388
Retained Profits £0

So your Gross Earning are
£84868.94+£4388 = £89256.94
On these earnings tax paid by the company was
ERS £10131.06+ CT £1050 + £28485.86 = £39666.92 and £987.50 owed in higher rate tax
You received net
Net Deemed Payment £56383.08 and dividend £3950 = £60333.08 less higher rate tax of £987.50 = £59345.58 ( 59% net )


So lets say that you had done your accounts on the Outside Ir35 example above and then realised you neede to do a deemed Payment calculation.

You can see that you would have received £70562.80 outside IR35 whereas inside IR35 once the accounts were restated you should have only received £60,333.08 and you would therefore owe the company £10,229.72

(this would appear as a directors loan account and may cause the trigger of Section 419 tax of 25% of the loan and possibly benefit in kind charges, it would depend on the year end date of the company, but lets try to steer clear of that one !)

Your personal tax bill would have reduced from £8755.60 in the outside IR35 example to £987.50 in the inside IR35 example. This would need to be adjusted by way of an SATR or a restatement of the SATR if it had already been filed using provision in the IR35 legislation.

The company under the outside IR35 calculation would have owed £9309.75 in CT and £20127.44 in PAYE including tax, ERS and EES.

After restating the accounts it now finds it owes £1050 and £38616.92 in PAYE including tax,ers and ees.

The company would reclaim the CT of £8259.75, (or apply to have this amount credited to the paye account), after that the company would owe a further £10229.73 in paye including tax,ers and ees.

The company at this point would need to ask the director for the £10,229.72 he was overpaid in the first place.

1p would be written off somewhere as an extra cost to the company !

Hopefully that helps ! ( this is an example , but the figures are skewed by 1) large salary in the outside ir35 example , and 2) no expenses )

Phil

[expat]

PhilAtBFCA seems to be the expert here, but I'll dive in with my understanding.

Any additional deemed payment is a company cost - not an employee payment.

But being inside IR35 doesn't force you to use PAYE - it merely applies an additional cost to the Ltd company, which means you end up paying the same or more - so it's eaiser just to go through PAYE.

So you're not retrospectively converting profits to salary - you're just applying an additional company cost to HMRC.

AIUI the deemed payment itself can not be said to be a cost, whether to the company or to the individual. The tax and NIC on it is a cost.

If the actual salary paid is less than the deemed payment (less 5%) then extra tax and NIC is due on the difference. This extra tax and NIC is of course a cost, although ISTM that it would come out of the deemed payment, and therefore be effectively a cost to the individual.

But more than that, it is not the whole deemed payment (nor even the excess deemed payment over salary) that becomes a cost and therefore reduces profits; it would be only the tax & NIC due that would be a cost.

Example: your Co pays you a salary of £50,000, and keeps £50,000 in the Co. Pay CT, let me say at a rate of 20% for simplicity: CT = £10,000. Pay dividends £40,000. Grossed up to notional £44,444. Therefore dividend tax (assuming HRT) of 22.5%, = £10,000.

Now Hector says that your deemed payment was £100k, not the plain salary of £50k. You are short tax and NICs on £50k. You (yes you, not the Co) have only paid £10k tax on that. You need to pay another £10k, from your own money, or to be precise from that deemed £50k. On top of that, the Co needs to pay ERs and EEs on the £50k. That means £500 (1%) EEs from you, and £6,400 (12.8%) ERs from the company.

The comany can of course reduce its profit by that £6,400 - but not by the £50k that it treated as profit.

Am I off track here?

[centurian]

Thenks.

I understand that the actual amounts due to HMRC (tx and NICs on deemed payment) are costs to the company.

I also understand that the deemed payment would have been zero if the required amount had been paid as salary. But it wasn't. It wasn't a debt owed by the company because the company had not agreed to pay that salary, it had specifically planned not to (but instead to retain profit). Can you really retrospectively classify last year's profit as last year's salary?

PhilAtBFCA seems to be the expert here, but I'll dive in with my understanding.

Any additional deemed payment is a company cost - not an employee payment.

But being inside IR35 doesn't force you to use PAYE - it merely applies an additional cost to the Ltd company, which means you end up paying the same or more - so it's eaiser just to go through PAYE.

So you're not retrospectively converting profits to salary - you're just applying an additional company cost to HMRC.

[expat]

expat

The Deemed Payment is there to show what PAYe and NICs should be charged on the earnings, but these are a debt owed by the company which has the obligation of paying them.

therefore they should be shown in the accounts of the company, this is best achieved by running it as salary.

the employers NI on the deemed payment is also a cost to the company and should be shown in the accounts.

the profit is therefore reduced, and the CT theron

One way that you could look at it is that the Deemed Payment could be zero when its calculated if the worker had a salary that was large enough, or caluclated to be large enough to cover the DP. See this link for more details as in my view this is the eassieast way to be compliant within IR35 contracts and still manage a Ltd Co.

Phil

Thenks.

I understand that the actual amounts due to HMRC (tx and NICs on deemed payment) are costs to the company.

I also understand that the deemed payment would have been zero if the required amount had been paid as salary. But it wasn't. It wasn't a debt owed by the company because the company had not agreed to pay that salary, it had specifically planned not to (but instead to retain profit). Can you really retrospectively classify last year's profit as last year's salary?

[PhilAtBFCA]

expat

The Deemed Payment is there to show what PAYe and NICs should be charged on the earnings, but these are a debt owed by the company which has the obligation of paying them.

therefore they should be shown in the accounts of the company, this is best achieved by running it as salary.

the employers NI on the deemed payment is also a cost to the company and should be shown in the accounts.

the profit is therefore reduced, and the CT theron

One way that you could look at it is that the Deemed Payment could be zero when its calculated if the worker had a salary that was large enough, or caluclated to be large enough to cover the DP. See this link for more details as in my view this is the eassieast way to be compliant within IR35 contracts and still manage a Ltd Co.

Phil

[expat]

rocsen

If you mean that you have been doing your accounts outside ir35 and then are deceided to be inside ir35 after an HMRC invesitgation then the situation would be that the accounts for the period in question would need to be restated, any CT paid may have to be credited back to the company due to the lower profits of the deemed payment being accounted for.

On the unpaid NI and PAYE tax and penalties if appropriate would be charged, with the interest prevailing at the rates applicable for the period.

centurian

Yes you dont end up paying tax twice. The Dividend distribution is reduced by the Deemed Payment according to the provisions in the legislation, but its not a very effective way of running your company inside IR35.

Phil

Is it true that the deemed payment reduces the profit? I thought the deemed payment was deemed only for the purposes of income tax and NIC liability?

I also remember reading on the HMRC site that they admitted that some legitimate actions crossing the Co year-end would lead to being taxed twice, and they could only suggest not doing that? Sorry, can't find link any more.

[PhilAtBFCA]

rocsen

If you mean that you have been doing your accounts outside ir35 and then are deceided to be inside ir35 after an HMRC invesitgation then the situation would be that the accounts for the period in question would need to be restated, any CT paid may have to be credited back to the company due to the lower profits of the deemed payment being accounted for.

On the unpaid NI and PAYE tax and penalties if appropriate would be charged, with the interest prevailing at the rates applicable for the period.

centurian

Yes you dont end up paying tax twice. The Dividend distribution is reduced by the Deemed Payment according to the provisions in the legislation, but its not a very effective way of running your company inside IR35.

Phil