Reply to: Backdating Company Pension Contributions re: IR35 investigation

[Baffle]

Since I seem to be alone in my interpretation of the question, hence the answer, I'll restate in simpler terms.

I think the OP is asking if, when investigated, he can legally make a pension contribution to offset IR35 liability for previous years, using pension allowances for those years.

The carried forward unused allowance for previous years affects the size of pension contributions allowed in the current year. They do not allow you to make retrospective contributions for previous years.

For IR35 purposes, the amount you can offset against the deemed payment is exactly the amount that was physically paid in the tax year in question.

Hi,

Correct, that was exactly what I was asking. I was referring to legal tax relief on pensions etc. Not fiddling accounts with tip-ex to change date!

Thanks for your contribution IR35avoider, your answer re: prior year liability and current year allowance makes a lot of sense, as I appreciate the current year allowance will not offset against a prior years investigation, so I think you're right there.

Cheers

[LisaContractorUmbrella]

Since I seem to be alone in my interpretation of the question, hence the answer, I'll restate in simpler terms.

I think the OP is asking if, when investigated, he can legally make a pension contribution to offset IR35 liability for previous years, using pension allowances for those years.

The carried forward unused allowance for previous years affects the size of pension contributions allowed in the current year. They do not allow you to make retrospective contributions for previous years.

For IR35 purposes, the amount you can offset against the deemed payment is exactly the amount that was physically paid in the tax year in question.

You can contribute what you like to a pension but if you have received a penalty from HMR&C as a result of an IR35 investigation, diverting money into a pension will not lessen the liability

[IR35 Avoider]

Since I seem to be alone in my interpretation of the question, hence the answer, I'll restate in simpler terms.

I think the OP is asking if, when investigated, he can legally make a pension contribution to offset IR35 liability for previous years, using pension allowances for those years.

The carried forward unused allowance for previous years affects the size of pension contributions allowed in the current year. They do not allow you to make retrospective contributions for previous years.

For IR35 purposes, the amount you can offset against the deemed payment is exactly the amount that was physically paid in the tax year in question.

[BlasterBates]

You can´t back date pension contributions. If HMRC decide you´re inside IR35 you just have to pay the extra tax.

Just make sure you´re covered with insurance.

[LisaContractorUmbrella]

I've wondered about that too, I think it's a fair question. Malvolio and Lisa's opinions are noted, I would now be interested to see what other people think about it. IR35 is by no means black and white so for the sake of the argument, let's consider that the director took all reasonable care to determine their status and there is no question of wrong doing.

Now, if HMRC are going to force the director to restate their income to make it IR35 caught (effectively meaning the earnings would have to be taken as PAYE) then does the director have the option to retrospectively pay it into a pension as they could have done if they had taken salary only?

I don't see that seeking to use a tax break is automatically "tax evasion" either. Let's not forget that the government deliberately set up tax breaks on pension contributions to encourage people to pay into them so why would they not allow it in this situation?

If you are caught by HMR&C they will raise an assessment for tax owed - if they are successful at a tax tribunal that amount will then become payable - what you do with your accounts is to all intents and purposes irrelevant - that money will be owed and you will have to pay it

[IR35 Avoider]

Thus, my question is:-

Say that in a few years time, my status was successfully challenged by the HMRC and I had to pay backtaxes for several years. Could I, at this stage, then instead backdate pension contributions using the 3 year X 50k allowance (I think that is correct!) to plough a load of money in at this stage, to reduce the liability to HMRC, or can this only be done prior to investigation?

Example :-

Say HMRC challenged and successfully imposed £30k in backtaxes………….. Could I subsequently pay £40k into a company pension, direct from the Ltd. Which would reduce the Employers NI, 40% tax due and Employees NI on this amount, or this just wishful thinking as it could have only been done before the demand was made?

Any expert advice on this would be most appreciated.

Many thanks,
Baffle

I don't understand why everyone else is talking about evasion, other than you use the word "backdate" which is usually used in the context of lying about when an event happened, which is not what you are proposing.

In short, the answer to your question is no. The 3x50K allowance affects what you can contribute and offset against your taxes in the current year, which is not the year HMRC will be investigating. The size of your pension contribution in the current year will have no effect on your IR35 deemed paymemt calculation for previous years, the ones under investigation. IR35 calculations are done on a cash basis, a pension contribution always belongs to the tax year in which the money was physically tansferred into the pension.

Edit: have just re-read the thread, and I still think everyone has misunderstood what the OP was asking. I reiterate: without a time machine it is literally impossible to backdate a pension contribution, as for IR35 purposes it is deemed to have happened when the cash was actually transferred.

[malvolio]

Yes, I've noted your opinion but considering how many times you post wrong information here I was wondering if anyone else had an opinion on it.

OK, so perhaps you would care to do your own research and explain why I'm wrong on this occasion? In yuor opinion, of course...

BTW the OP's scheme possibly wouldn't work anyway. The company's accounts for previous years have been closed, so any backdated payment would come out of current (or retained) funds and the resultant tax refunds claimed for the current tax year. HMRC may not be too willing to give you a tax credit payment when they've already proved you have underpaid tax outstanding.

[minstrel]

It's an interesting question Baffle, but I expect HMRC would not allow it.

IMO the best way to mitigate against investigations is to close your Ltd company down every 2-3 years and start another one. HMRC generally don't investigate closed companies, and I think they only have 12 months after you submit your personal self assessment tax return to open a standard enquiry.

[jamesbrown]

Yes, I've noted your opinion but considering how many times you post wrong information here I was wondering if anyone else had an opinion on it.

In my non-expert opinion, it's a pretty clear-cut example of tax evasion. If you were questioned in court as to why this was done, the truthful answer would be to avoid paying the tax that was legally established to be due (hence evasion). It's really no different than running with the money IMHO.

[northernladuk]

Yes, I've noted your opinion but considering how many times you post wrong information here I was wondering if anyone else had an opinion on it.

Well if backdating your finances are allowed why not pay the money back and back date the dividend paperwork i.e bin it so you effectively didn't pay yourself anything and then just liquidate the company.

Sounds stupid but it's more or less the same thing isn't it. I can't see any backdating being allowed once you are caught. It just doesn't make sense.

but I am sure I post a lot more wrong information than Mal does so

[Wanderer]

No, absolutely not.

Yes, I've noted your opinion but considering how many times you post wrong information here I was wondering if anyone else had an opinion on it.

[malvolio]

I've wondered about that too, I think it's a fair question. Malvolio and Lisa's opinions are noted, I would now be interested to see what other people think about it. IR35 is by no means black and white so for the sake of the argument, let's consider that the director took all reasonable care to determine their status and there is no question of wrong doing.

Now, if HMRC are going to force the director to restate their income to make it IR35 caught (effectively meaning the earnings would have to be taken as PAYE) then does the director have the option to retrospectively pay it into a pension as they could have done if they had taken salary only?

I don't see that seeking to use a tax break is automatically "tax evasion" either. Let's not forget that the government deliberately set up tax breaks on pension contributions to encourage people to pay into them so why would they not allow it in this situation?

No, absolutely not.

The assessment is made on the basis of what happened. HMRC having demonstrated you applied the incorrect tax treatement to the monies involved, what you have to do now is apply the correct treatment, pay the missing taxes and interest and then work out what to do with what's left.

Which is why moving money around after a judgement but before working out the figures is evasion.

[Wanderer]

Say that in a few years time, my status was successfully challenged by the HMRC and I had to pay backtaxes for several years. Could I, at this stage, then instead backdate pension contributions using the 3 year X 50k allowance (I think that is correct!) to plough a load of money in at this stage, to reduce the liability to HMRC, or can this only be done prior to investigation?

I've wondered about that too, I think it's a fair question. Malvolio and Lisa's opinions are noted, I would now be interested to see what other people think about it. IR35 is by no means black and white so for the sake of the argument, let's consider that the director took all reasonable care to determine their status and there is no question of wrong doing.

Now, if HMRC are going to force the director to restate their income to make it IR35 caught (effectively meaning the earnings would have to be taken as PAYE) then does the director have the option to retrospectively pay it into a pension as they could have done if they had taken salary only?

I don't see that seeking to use a tax break is automatically "tax evasion" either. Let's not forget that the government deliberately set up tax breaks on pension contributions to encourage people to pay into them so why would they not allow it in this situation?

[Baffle]

HMR&C would view it that the only reason you were attempted to make back-dated pension contributions, on which you would receive tax relief, would be to try and avoid all or part of an existing tax liability

Lisa,

Many thanks for your response.

Ok, well as I say purely a theoretical question anyway and certainly wouldn't want to fall foul of evasion so would not attempt it if the situation arises, was just curious as to whether or not it could be done - obviously not!

Thanks

[LisaContractorUmbrella]

Malvolio,

I fully understand that pensions do not reduce the risk, they merely reduce liability. So I don't see your point about not being versed on IR35? What I meant by the comment is that I have not just set up shop without taking professional advice etc many have.

When calculating the deemed payment for calculation purposes, is the pension contribution not deducted prior to the calculation of the deemed payment? My point was that to pay enough money into a pension for nearly 30 years to offset half of my IR35 exposure isn't really suitable. Fair enough, if was 45 or something .....

I was asking if it is legal to pay it into a pension anyway, why could you not do it a later stage? You say tax evasion but on what ground? If you can legally pay into a ltd company pension , which reduces IR35 liability if found to be inside at a later stage, then what is stopping you doing this at a later stage and taking advantage of the fact that you have a 50k ltd pension limit and can take advantage of 3 years (iirc) backdated allowance?

I did not imply that it reduces risk of IR35, I was talking purely from a liability standpoint.

Regards,
Baffle

HMR&C would view it that the only reason you were attempted to make back-dated pension contributions, on which you would receive tax relief, would be to try and avoid all or part of an existing tax liability