Reply to: IR35 and tax liability on money kept in the company?

[northernladyuk]

They take payment in kind..... It's how NLadyUK has been doing the shopping for years.

And when we run out of milk, I just give you a little squeeze.

[northernladuk]

Not if it takes you above the 5% expense allowance it isn't.


Now, if you do the income splitting thing, how do they get it off your missus when she's not a director but a shareholder (assuming the Ltd does not have the funds).

They take payment in kind..... It's how NLadyUK has been doing the shopping for years.

[Old Greg]

The cost to the possibe amounts are pretty insignificant. 700 quid to protect 100K? If you are this worried about it all seems a no brainer to me. Remember its deductable so helps your CT as well

Not if it takes you above the 5% expense allowance it isn't.


Now, if you do the income splitting thing, how do they get it off your missus when she's not a director but a shareholder (assuming the Ltd does not have the funds).

[mickael28]

Yeah, I was mainly thinking about their business model. If there are not many IR35 investigations and they usually win the cases anyway, it just takes them like £140 contractors to cover the possible maximum fine.

I had never thought about it and I was not sure how they could insure you against such a penalty, but it makes sense thinking about it now.

[northernladuk]

I think so too, it makes sense if you're outside the IR35 and don't go over the 40% personal tax but not if you're inside.

And thinking about this scenario now, if you're outside the IR35 and keep the retained profit that will put you in the higher tax bracket in the company, I think that in a few years (like 5 or 7) you could have something like £100k due to Employer's NI, PAYE and NI that you didn't have to pay.

I've now seen that QDOS offers a TLC35 insurance where you can insure against tax penalties up to:
* 50k for ~£370
* 75k for ~£500
* 100k for ~£700

Do you guys (who keep the retained money in the company) have this kind of insurance? thinking that even the basic one for £370 is not enough after some years of contracting...

The cost to the possibe amounts are pretty insignificant. 700 quid to protect 100K? If you are this worried about it all seems a no brainer to me. Remember its deductable so helps your CT as well

[mickael28]

"but I do believe that retaining IR35'd funds in the company is LIKELY to be possibly inefficient from a taxation point of view in some circumstances.

I think so too, it makes sense if you're outside the IR35 and don't go over the 40% personal tax but not if you're inside.

And thinking about this scenario now, if you're outside the IR35 and keep the retained profit that will put you in the higher tax bracket in the company, I think that in a few years (like 5 or 7) you could have something like £100k due to Employer's NI, PAYE and NI that you didn't have to pay.

I've now seen that QDOS offers a TLC35 insurance where you can insure against tax penalties up to:
* 50k for ~£370
* 75k for ~£500
* 100k for ~£700

Do you guys (who keep the retained money in the company) have this kind of insurance? thinking that even the basic one for £370 is not enough after some years of contracting...

[ASB]

"Thanks for the explanation!, good example to understand things a little bit more..."

It is of course just my opinion and worth precisely what you paid for it. However it may give you some insight into the things you need to consider and research.

"When you say distributed, you mean that such amount is what could be taken out from the company bank account into your personal bank account, correct?"

Broadly yes, this being the distributable reserves. In essence this is general the shareholders funds. in effect say you make 100k profit, pay 20k in tax then the shareholders funds increase by 80k and this can be distributed as dividends.

"If you've paid all those taxes in deemed salary and don't take it out, why could you want to keep it not distributed?"

There could be many reasons. Normally to purchase assets in pursuance of the business. IR35 muddies the waters somewhat though.

Lets say I spend half my time contracting, produce 50k gross with no expenses and half my time developing my widget distribution system. Outside IR35:-

50k profit, 12.5k tax, I take no money, retain the 37.5k. I spend this purchasing a widget packer. Now an asset (represented as retained funds in effect).

Now in IR35, I do the same thing. The only difference is the tax hit is bigger.

BUT in this scenario it would probably have been better to pay the 50k as salary and lend the money back to the company. (The point being that it is only taxed once and if I took it out as salary it's "free and clear".

IR35 does not affect how the company uses it's money, only how it is taxed.

Since the latter scenario is not something that will ever happen to me I have not thought about it in great detail; but I do believe that retaining IR35'd funds in the company is LIKELY to be possibly inefficient from a taxation point of view in some circumstances.

This is exactly what could happen in one became IR35 caught "down the line" and wasn't able to fully resubmit the accounts on a different basis (and I'm not convinced this would be allowed).

[IR35 Avoider]

The tax is a personal tax, so the debt is on the individual not the company.

Deemed salary is exactly the same as actual salary, which means
(a) The employer's NI salary attracts is a tax on the company. The only way this could be passed to the individual is if in his capacity as a director he acted so recklessly/fraudulently that he becomes liable for company debts. I doubt that simply miscalculating his IR35 status would put him into that category. So in short, the individual is never on the hook for employer's NI.
(b) The income tax and employee's NI on a salary are in theory a tax on the individual, but the company has an obligation to deduct the correct amount, therefore it is the company that is liable in the first instance. If the company doesn't pay, the individual can be held liable, but there are rules that prevent HMRC going after employees where it is the employers fault that the correct amount has not been deducted. I don't know if those rules would offer an IR35-caught contractor any protection, I doubt it. The rules are there to protect employees against unscrupulous/incompetent employers, it would be illogical for them to protect a contractor as employee against himself as director.

[mickael28]

Distributable reserves increased by 41.2k (irrespective of whether they are distributed or not).

Thanks for the explanation!, good example to understand things a little bit more...

When you say distributed, you mean that such amount is what could be taken out from the company bank account into your personal bank account, correct?

If you've paid all those taxes in deemed salary and don't take it out, why could you want to keep it not distributed?

[ASB]

This will probably go down like a lead balloon. Here is a starter:-

How to work out the taxable profits of the intermediary
HM Revenue & Customs: IR35: Countering Avoidance in the Provision of Personal Services - FAQ's

The deemed payment gets relieved against the CT for the period in question. Accounts will need to be restated etc, but this can still lead to an element of double taxation. [Somewhere I have a letter from my MP on this very point with HMRC in fact confirming this but claiming it is not double taxation]

Consider the starter point.

Turnover 80k, salary nil, expenses nil. CT = 16k. This is paid. Dividends of £50k are paid, giving rise to higher rate tax of circa 2.5k. There is 14k left in the company.

Along come HMRC and you are IR35 gotcha'd a couple of years later.

Now we have a problem.

Firstly the NICs and tax are calculated on this figure, lets call it for ease 80k x 95% x 50% = 38k.

The CT calculation allows relief for this, so 22k is handed over (ok the company hasn't got it which I'll mention later). Of course the taxpayer is now in a worse position than had they taken this as a salary.

There is also a question because the net shareholders funds are now 14k - 22k = -6k. Strictly the company is now insolvent and the dividends are illegal under the companies act (at least this is my understanding, I suppose the accounting standard might mean the deemed payment can be excluded in calculating distributable reserves but somehow I doubt it).

I would be grateful if there is any guidance that could be pointed out to me that allows for a full restating of the accounts. But let's now assume it does.

Broadly then we would now have:-

T/o 80k
Deemed payment 38k
"Profit" 42k

CT (because of the way things are balanced) = 80k x 5% x 20% = 0.8k

Distributable reserves increased by 41.2k (irrespective of whether they are distributed or not). Again there is a question mark over the dividend legality.

The point arises as to whether one can "go back in time" and actually "cancel" the dividends and make the payment of the "deemed salary". People do assert that you can, and this may well be what happens in practice. However I can find no guidance to actually support this view. [It would be dreadfully unfair if you can't].

In summary, because the deemed payment is made on a deemed salary rather than an actual paid salary unless HMRC allow FULL restating of the accounts INCLUDING rewriting the dividends and making the net "deemed" salary payment into a directors nominal account then there will be an element of double taxation.

Moving onto the question of transferring the liabilities, specifically Er's NI onto the individual I would recommend searching for posts by THEPUMA on this subject.

He makes a good case as to why this, in actual fact, may not be possible. He also made a case as to why the transfer of the income tax and EE's NI liabilities direct to the taxpayer may also not be possible.

Certainly worth reviewing and researching the arguments he cited and making up ones own mind.

[psychocandy]

Yes I probably am, being relativly new to this game I like to know potential worst case scenarios. I have my contracts reviewed & I'm in the PCG so I'll keep calm & keep invoicing.

Glad to see your in PCG and have got some sort of IR35 insurance.

[Coolshot]

Yeah, I read that as being that the tribunal believed that HMRC wouldn't get their hands on the cash anyway, but they felt it was important to try and render a judgement anyway.

However that doesn't mean that HMRC will get the message - they could still try and pursue Spencer personally

Nope. You are getting overly worried about something that hasn't happened yet. Why so interested in the nitty gritty when no one else is bothered? You flying a bit close to the line or something?

Yes I probably am, being relativly new to this game I like to know potential worst case scenarios. I have my contracts reviewed & I'm in the PCG so I'll keep calm & keep invoicing.

[northernladuk]

Ok. Are there any examples of cases where HMRC won an IR35 case but there were insufficent company funds to cover the deemed payment & then HMRC subsequently took the director on personally?

Nope. You are getting overly worried about something that hasn't happened yet. Why so interested in the nitty gritty when no one else is bothered? You flying a bit close to the line or something?

[Coolshot]

Yeah, I read that as being that the tribunal believed that HMRC wouldn't get their hands on the cash anyway, but they felt it was important to try and render a judgement anyway.

However that doesn't mean that HMRC will get the message - they could still try and pursue Spencer personally

Ok. Are there any examples of cases where HMRC won an IR35 case but there were insufficent company funds to cover the deemed payment & then HMRC subsequently took the director on personally?

[centurian]

and the judgement goes on to note that the retained funds in the company were in the order of £2,000.

Make of that what you will......

Yeah, I read that as being that the tribunal believed that HMRC wouldn't get their hands on the cash anyway, but they felt it was important to try and render a judgement anyway.

However that doesn't mean that HMRC will get the message - they could still try and pursue Spencer personally