Reply to: IR35 question

[TheFaQQer]

If the ROS is fettered, then you should have something in the contract that says, for example, "such approval for a replacement will not reasonably be withheld".

That way, the client can approve your replacement (so clearance, experience etc. etc.) but can't just say no to everyone that you find.

[centurian]

That is just not true, things such as security clearance, qualifications, fraud and credit and other background checks in sectors from government to investment banking mean the client has a perfectly good right to approve any substitute - this doesn't mean an IR35 failure.

I think Lisa's statement was pretty accurate. She didn't say that you would definately fail - just likely to based upon previous cases. It was a factor in Dragonfly.

Lack of ROS won't be an automatic fail, but will definately count against you. How much you can mitigate this will depend on the circumstances.

[GreenerGrass]

fettered ROS (ie. client would have to approve substitute) then it is likely that you would fall inside IR35 based on previous cases

That is just not true, things such as security clearance, qualifications, fraud and credit and other background checks in sectors from government to investment banking mean the client has a perfectly good right to approve any substitute - this doesn't mean an IR35 failure.

[Fred Bloggs]

Thanks for that, QDOS.

[malvolio]

Which, with rather more detailed supporting argument and citations, is pretty much what I meant to say originally.

[Qdos Contractor]

Right, this is going to be a lengthy one...

As part of the process of completing form P35, the employer is expected to have considered whether or not they are operating inside or outside of IR35 & complete & sign the annual return accordingly. A contractor cannot therefore claim to be blissfully ignorant.

To simply suggest that Dragonfly have not paid over any of the £99K PAYE/NIC arrears, without substantiating this, is mere speculation at best. We have to remember that Dragonfly would be entitled to corporation tax relief on both the deemed payment & the employers NIC, so there could well have been a set off of corporation tax overpaid against the £99K, leaving the company with a 'net' liability. The Companies House website shows that Dragonfly Consultancy Ltd is still active with a proposal to strike off, so it has not been formally dissolved as yet.

When a company wishes to become struck off the company register it must apply to the Registrar who then invites any objections to such a proposal by advertising in the London Gazette. If no objections are forthcoming after 3 months of posting the advertisement, then the company can be struck off. All correspondence about company striking off is channelled through Company Extracts Section (CES) at the Centre for Research & Intelligence or in Scotland Edinburgh St Giles. CES or St Giles acts as the liaison between HMRC & Companies House. It refers the Companies House notification of proposed striking off & co-ordinates the issue of objections to Companies House. Where a company therefore, either trading or not, has evidence of outstanding tax liabilities, then HMRC will always object to any striking off.

Phoenixism & Personal Liability Notices (PLNs)

Phoenixism is a term used to describe the practice where directors carry on the same business or trade successively through a series of two or more companies. Each of the companies in turn becomes insolvent, leaving large unpaid tax & NICs debts. Where such deliberate practice takes place then HMRC has at its disposal Section 121C, Social Security Administration Act 1992. This applies to NICs that a company is liable to pay where:

- it has failed to pay the NICs at or within the prescribed time for the purpose; and
- the failure appears to HMRC to be attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers of the company.

Such officers are known as "culpable officers" & the legislation allows HMRC to serve a PLN on any such officer thus transferring the company's NIC liability to the culpable officer.

'Negligence' means failing to do what a prudent & reasonable person would do or simply failing to exercise reasonable care.

Recovering tax not deducted by an employer from an employee

Where an employee has received payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments then HMRC can recover the tax due from the employee by virtue of Regulations 72(1) - (6) & 81 (1) - (5) Income Tax (PAYE) Regulations 2003. If a contractor therefore realises that their company is caught by IR35 but continues to disregard PAYE responsibilities then I would care to suggest that that is wilful!

Other Points

- It is correct to say that IR35 legislation has not changed but recent case law has redefined points of employment status & assisted HMRC in their cause, e.g MOO & control (Dragonfly).
- Qdos do not prey on contractors fears of IR35 in an attempt to sell TLC. That would be unethical, unprofessional & misselling of insurance. Rather, we provide a product that provides a safety net due to the fact that employment status is not a precise science.

Contractors should be left in no doubt that if they simply think they can close down their company's leaving behind large PAYE/NICs debts & start afresh in a newly formed company, then HMRC will have no hesitation in pursuing them individually for tax & NIC arrears. HMRC are very aware of phoenixism & will crack down on it.

[ASB]

If you have no ROS, or a fettered ROS (ie. client would have to approve substitute) then it is likely that you would fall inside IR35 based on previous cases. If this is your situation then you can only receive payment of your earnings through PAYE whether it be through an umbrella or via your own limited company. If you have a limited company and fall inside IR35 you cannot draw dividends from that company.

HTH

That is NOT true. Payment can still be made via dividends if required. [Though it would as likely just complicate matters due to the deemed payment rules, indeed there is no requirement for the income to be paid at all - only the PAYE on it]

[LisaContractorUmbrella]

I am serious and am just being honest. I think there are 1000s like me and it all seems to be too confusing the more i look into things. I previously thought i might be ok as there seemed to be many grey areas but right of substitution is a problem among other things. I do pay corporation tax and PAYE and NIC on a minimal wage as an employees. All i am trying to do is go the best way and have some clarification.

As for Qdos, i did complete their insurance application form and was refused due to ROS. Which is why i may go to umbrella instead. Not trying to commit any criminal activity but just want to know for definite how things are done and what my options are. Kind of hard to get honest answers as all the "experts" want to sell their products!

If you have no ROS, or a fettered ROS (ie. client would have to approve substitute) then it is likely that you would fall inside IR35 based on previous cases. If this is your situation then you can only receive payment of your earnings through PAYE whether it be through an umbrella or via your own limited company. If you have a limited company and fall inside IR35 you cannot draw dividends from that company.

HTH

[hammerman]

ermm... Assuming you're serious , you do realise you have just confessed to tax evasion...?

(a) Why are you caught? (Bet you aren't, really )

(b) If you are, why are you not paying the tax due?

(c) Why do you think you can get insurance against a criminal activitiy? Do you think QDOS or anyone else would pay out if you haven't made an honest declaration of your status?

I am serious and am just being honest. I think there are 1000s like me and it all seems to be too confusing the more i look into things. I previously thought i might be ok as there seemed to be many grey areas but right of substitution is a problem among other things. I do pay corporation tax and PAYE and NIC on a minimal wage as an employees. All i am trying to do is go the best way and have some clarification.

As for Qdos, i did complete their insurance application form and was refused due to ROS. Which is why i may go to umbrella instead. Not trying to commit any criminal activity but just want to know for definite how things are done and what my options are. Kind of hard to get honest answers as all the "experts" want to sell their products!

[malvolio]

I know I'm inside IR35 but if I can get away with not paying anything if caught out then I will carry on.

ermm... Assuming you're serious , you do realise you have just confessed to tax evasion...?

(a) Why are you caught? (Bet you aren't, really )

(b) If you are, why are you not paying the tax due?

(c) Why do you think you can get insurance against a criminal activitiy? Do you think QDOS or anyone else would pay out if you haven't made an honest declaration of your status?

[THEPUMA]

Is that as things were at the time Dragonfly was operating, or is that the case now under current regulations

The legislation has not changed.

Interesting info there, another reason not to leave much money in the company.

There is a trade-off here though because if you take dividends out and pay 25% tax on them, that is less tax-efficient than leaving the surplus in and potentially taking it out at 10% when you come to close your company down.

[centurian]

Am I paying IR35 insurance for nothing then? I only keep tax money in the account. All else is drawn out. Anyone from QDOS care to comment please?

I'm pretty negative about insurance as a whole, so probably not the best to comment.

But if nothing else, consider it an extra 'sleep-at-night' aid.

I don't believe that either strategy gives an absolute 100% protection, but the two combined might push it closer. Two bodyguards are better than one.

[hammerman]

As previously mentioned, they can only recover liabilities from an individual where it can be shown that he/she wilfully failed to deduct tax. This would not be the case where you have traded in the false belief that you were not caught by IR35.

There seems to be alot of confusing information. I dont know whether companies like Qdos make money out of fear of IR35 as the reality of paying large amounts of money back maybe different. I've looked at so many sites but there doesnt seem to be anything definite. Just alot of sites trying to sell their products! I know Qdos will represent me for the fee of £100 per year but is this fee so low beause not many contractors get investigated?

I know I'm inside IR35 but if I can get away with not paying anything if caught out then I will carry on. Has anyone on here been investigated and had to pay or know of anyone thats gone through it? Would be good to know what really goes on.

[Fred Bloggs]

As previously mentioned, they can only recover liabilities from an individual where it can be shown that he/she wilfully failed to deduct tax. This would not be the case where you have traded in the false belief that you were not caught by IR35.

Am I paying IR35 insurance for nothing then? I only keep tax money in the account. All else is drawn out. Anyone from QDOS care to comment please?

[GreenerGrass]

Interesting info there, another reason not to leave much money in the company.