IR35 and Dividend tax

[malvolio]

But if you have two contracts, one inside and one outside, it's only the gross income from the inside one that has to be taken as salary less 5%. The other one can go through the company books exactly as normal. And if at the end of the year you have a net profit, you can take a divi.

IR35 is not a state of being, it's strictly a per contract assessment. And if you aren't clear on your status at the start of the gig, either don't take it or assume you're outside until proven different - which is highly unlikely, especially with proper investigation insurance in place.

[centurian]

I never said you would want to do it, but strictly speaking, it's how every contract should operate.

You can't truly decide your IR35 status on the basis of the contract alone. You can only make an informed decision once you've been there for a while and can ensure that the working practices are aligned with the contract. In the meantime, you may have already made dividend payments.

This happened to me on my first contract. I didn't fully understand IR35 and the working practices onsite were very heavily inside IR35 - think Dragonfly/AA on a good day - and ClientCo would not budge an inch. It was at the start of the recession, so they could afford to be awkward and 95% PAYE was better than 100% divs of nothing.

But the answer to the OP's question is that you can effectively redefine dividends as PAYE - as long as it's done in the same financial year.

[malvolio]

That means you can change your mind halfway through the year - at least in terms of putting yourself inside IR35. But the deemed payment has to be made by 19th April.

Does not compute. Why the hell would you change your status, especially to being inside IR35 (which is foolish in the extreme, IMHO). Unless you are switching contracts, in which case each contract is assessed separately anyway. The 95% deemed earnings rule only applies to engagement that fall within IR35 (i.e a vanishingly small number of them), not your annual corporate earnings.

[centurian]

Don't know about an HMRC link, but I do recall asking the question of one of the experts a while back, who confirmed my own thoughts. Basically you would re-calculate the whole taxation position, deduct everything already paid and pay the balance, plus interest.

Thing is, though, it's never yet happened, so nobody is any too sure.

According to my accountant, IR35 doesn't ban dividends, it just mandates an additional balancing payment (called a deemed payment), which just happens to be the same as if 95% PAYE had been operated.

That means you can change your mind halfway through the year - at least in terms of putting yourself inside IR35. But the deemed payment has to be made by 19th April.

[malvolio]

You are spot on. Reading through the documents, I remember some discussions around this. Is there an hmrc link you can point me to on this matter?

Cheers.

Don't know about an HMRC link, but I do recall asking the question of one of the experts a while back, who confirmed my own thoughts. Basically you would re-calculate the whole taxation position, deduct everything already paid and pay the balance, plus interest.

Thing is, though, it's never yet happened, so nobody is any too sure.

[tyut4669]

You mean do they ignore the tax you've already paid in calculating how much you owe? That would be a whole new level of unfair.

Technically those dividends are now illegal, as they weren't paid out of profit. IR35 means the company's money is now yours tax free, so any amount you paid in tax on dividends is credited back to your account.

You are spot on. Reading through the documents, I remember some discussions around this. Is there an hmrc link you can point me to on this matter?

Cheers.

[VectraMan]

You mean do they ignore the tax you've already paid in calculating how much you owe? That would be a whole new level of unfair.

Technically those dividends are now illegal, as they weren't paid out of profit. IR35 means the company's money is now yours tax free, so any amount you paid in tax on dividends is credited back to your account.

[pmeswani]

Does any one know for sure -

If one is reviewed for IR35 and is caught, does the dividend taxes be deducted while paying the fines to HMRC? I know for sure about the corporation tax would be counted but not sure about the dividend tax.

I do know that 95% of the business income is taxable, which means that you should take your income as PAYE and pay tax on that income. However, I don't know if you can take divies if you are IR35 caught.

[tyut4669]

Does any one know for sure -

If one is reviewed for IR35 and is caught, does the dividend taxes be deducted while paying the fines to HMRC? I know for sure about the corporation tax would be counted but not sure about the dividend tax.