IR35 exposure & mitigation

[Craig at Nixon Williams]

Paying a higher salary or paying large amounts into a pension won’t mitigate the risk of an enquiry being started, what it will reduce is the amount of extra tax that can be collected if HMRC can successfully prove that IR35 should apply.

If you have had your contracts and working practices reviewed by a professional then you should have some assurance that your arrangement would stand up to HMRC scrutiny – if you are still uncomfortable then there are insurance products around that can cover the actual tax due in the event that you got a tax bill following a status enquiry.

Hope this helps!
Craig

[BjornMorg]

Isn't this the type of behaviour by the minority that gives all contractors a bad name and puts public pressure on HMRC to find more ways to tax us?

Have to agree...

[MPwannadecentincome]

Some are using all the tricks to get money out of their company e.g. charging non-business expenses through their business and in at least one case I know of, buying 1st class fights to spurious seminars in the States, cashing in the ticket and buying an economy to fund their family holiday.

Isn't this the type of behaviour by the minority that gives all contractors a bad name and puts public pressure on HMRC to find more ways to tax us?

[malvolio]

"It's slightly worrying you've been a contractor for some time and still have no idea how it works." I think that's a bit harsh, I work in a large team most of whom are contractors.

No it's not. You apparently don't understand IR35 and you have an incomplete knowledge of the tax landscape surrounding your business. When I say "Join the PCG and read the guides", it's so you can find out how much you don't know: you won't do that asking questions on here one at a time. It may be harsh advice, and I tend not to pretty things up too much, but it is solid advice. Don't ask for help and then complain you don't like the answer.

You've already discovered a lot of contractors think it's all a game with the objective of getting away with as much as you can. It isn't, it's deadly serious. Your guy with the airline tickets is committing tax evasion, pure and simple, and that carries a ten year jail term, but that's his problem.

[northernladuk]

As I read it working practices are a much smaller part these days - they also look at advertising spend, office premises and a whole lot more. I realise it's not yet been fully tested in the courts so is still fuzzy. But as per above I don't want to be "caught up with"! some years down the line - I believe they can challenge you up to 7 years later, and more if they then find evidence.

Not sure where you get that from. Working practices will always trump the contract. I think you are confusing the Business Entity Test which gives you a risk profile which might help them decide who to investigate first but if they do set eye on you they will be all over your contract and more importantly your working practice, specifically looking at RoS, MoO and D&C amongst others. Having your own office etc is a small pointer. You can have your own office but still have a disguised permie arrangement with the client.

[smokie]

2 year rule = not a problem as I go to the office maybe once a week (< 40%)

"It's slightly worrying you've been a contractor for some time and still have no idea how it works." I think that's a bit harsh, I work in a large team most of whom are contractors. Most are quite happy burying their heads in the sand and hoping that the taxman will not catch up with them. Most are also long term contractors, considerably younger than me(!!) who would have quite a large problem if they were deemed inside IR35. Some are using all the tricks to get money out of their company e.g. charging non-business expenses through their business and in at least one case I know of, buying 1st class fights to spurious seminars in the States, cashing in the ticket and buying an economy to fund their family holiday. This company may only be my second contract, but I have done what I can to learn the rules. Unless by "how it works" you mean screw everything you can from it? Also I am here to learn...

The payment to my wife was during the year of the other contract and I don't believe I would have any chance of being inside IR35 for that, so hopefully no problem.

As I read it working practices are a much smaller part these days - they also look at advertising spend, office premises and a whole lot more. I realise it's not yet been fully tested in the courts so is still fuzzy. But as per above I don't want to be "caught up with"! some years down the line - I believe they can challenge you up to 7 years later, and more if they then find evidence.

btw I think I gave the impression I might do the pension thing in 2014/15, not so - I want to get some money from my efforts next year!!

[ASB]

It seems to me that quite a lot of your legit expenses are not anyway. 2 year rule.

In terms of Ir35 about the only thing you can do yo mitigate is pension. Your ifa is correct in terms of warning that taking 25% lump sum in immediate vesting in multiple pensions may be problematic. Do a bit of research, some have been successful though. Google will do. Then you can form your own judgement. You dont want to get in there for potentially unauthorised payments. 55% tax rate.

The cost on the basic rate band in ir35 is about 10k extra inside ir35 compared with outside. On the rest if it had been drawn it will have cost you 40% to get it out. Under ir35 it will be due approx 14%. The portion not paid out will require about 54%..

Then there is what was paid to you wife. Unwinding that will be a bit tricky and expensive. Of course this is only relevant if you decide you were caught previously rather than you have become caught.

I am sure mals stats as right. But they are generally challenging folk in those who do not believe they are caught and have made some efforts in that direction.

however what is never noted, probably because it is unknowable, is how many people just hold their hands up and treat themselves as caught, how many have gone brolly, how many simply capitulate themselves on an initial enquiry. Know some of that and it will actually paint, in my view, a better but less bullish picture.

[malvolio]

Thanks. If I end up in IR35 I don't see how an accountant can really help - the online service is limited but was less than half the price of the Real person who was my first accountant, and if I go the IR35 way I don't see there is much an accountant can save for me.

Someone mentioned 5 years in the same contract, it's not even two yet, and I expect it to end around the next contract renewal period (which would be approx 2y 9m).

Tempted to shovel it in a pension. I have a buddy (IFA) who really knows his stuff in this area and he said there could be problems with recycling I think the term was, if I take money from one pension while setting up a new one. I am having a formal session with him soon but he told me over a pint recently that I can't do flexible drawdown as you can't do that until £20k p.a. of pension is actually in payment. My pension pot from my permie days was at one time pretty good but the ravages of the last few years have made it less so, and I might need the state pension to kick me over the £20k to enable flexible drawdown (flexible drawdown sounded so much better as it's less limiting in what you can take out each year).

I've always taken the QDOS IR35 insurance but I'm sure there was a questionnaire at renewal this year and I felt that I could be perceived as not answering everything completely honestly, which presumably could nullify the insurance.

Is the point of removing my wife as shareholder simply to remove her divvy and tax liability or is there more to it?

I now have one role which will see me through the rest of the project (as of 6 or 7 months ago) - delivering one piece of work. I've not had any changes to my contract with each project change.

It's slightly worrying you've been a contractor for some time and still have no idea how it works. Your job is "Be a Contractor", not "Be a PM", that's just the skill you're selling. You should be as good at the former as you presumably are at the latter. Anyway...

As others have said, contributions to a Pension fund are tax free, and you can put away up to £40k a year from the next tax year. You can also keep 25% of that tax free back into your personal account. Stick with the salary and divis up to the higher rate limit. If you need more, take it and accept the tax hit; you work to live, not the other way round. Find a good IFA to help you through the minefield, but make sure they understand company vs personal pensions.

Join the PCG. Read their Guides. If HMRC come calling, stand back and let your membership insurance deal with it. And stop worrying; IR35 is not the be all and end all; well over 95% of cases are defeated or abandoned, well over 95% of contractors never get challenged.

[smokie]

Thanks. If I end up in IR35 I don't see how an accountant can really help - the online service is limited but was less than half the price of the Real person who was my first accountant, and if I go the IR35 way I don't see there is much an accountant can save for me.

Someone mentioned 5 years in the same contract, it's not even two yet, and I expect it to end around the next contract renewal period (which would be approx 2y 9m).

Tempted to shovel it in a pension. I have a buddy (IFA) who really knows his stuff in this area and he said there could be problems with recycling I think the term was, if I take money from one pension while setting up a new one. I am having a formal session with him soon but he told me over a pint recently that I can't do flexible drawdown as you can't do that until £20k p.a. of pension is actually in payment. My pension pot from my permie days was at one time pretty good but the ravages of the last few years have made it less so, and I might need the state pension to kick me over the £20k to enable flexible drawdown (flexible drawdown sounded so much better as it's less limiting in what you can take out each year).

I've always taken the QDOS IR35 insurance but I'm sure there was a questionnaire at renewal this year and I felt that I could be perceived as not answering everything completely honestly, which presumably could nullify the insurance.

Is the point of removing my wife as shareholder simply to remove her divvy and tax liability or is there more to it?

I now have one role which will see me through the rest of the project (as of 6 or 7 months ago) - delivering one piece of work. I've not had any changes to my contract with each project change.

[ctdctd]

If you are 58, keep shoving it in a pension - IR35 proof

Get your personal income by taking the 25% tax free and / or drawing down from the pension?

[northernladuk]

And get a new accountant. A good accountant is going to save you money in that situation I reckon.

[northernladuk]

4. Ensure your working practices are out of IR35 - make sure the client doesn't regard you as part of the furniture and keep evidence.

Am thinking that train has left looking at the paragraph below.

I started a 6 month contract in 2012 which then got extended a couple of times for short periods (between 1 - 3 months) and last March was given a 12 month contract. This has just been renewed for a further 12 months, 2 week notice period. I work as a project manager and have worked on different projects within the same area but for the past 6 months and through to the end of the new contract I am expecting to work on the same project.

Devil is in the details but with 12 month contracts and working on different projects I think he is already seen as part of the furniture by the client. The 12 months keep the paperwork out of the way and they just allocate him work as they want. I would say he is in a marginal situation and really needs to look at it carefully if he wants to be so squeaky clean. 5 years at a client with 12 month rolling contracts is not a good position to be in. I will assume he isn't getting a new schedule of work for each project and even if he is it won't be hard to argue this is just keeping paperwork happy and isn't reflective of a b2b situation.

[SueEllen]

1. Get IR35 insurance every year - either join the PCG as it comes with membership or take out separate insurance from the likes of QDOS.

2. Get your current contract reviewed so you know the risks then for every different piece of work make sure you get an amended contract schedule.

3. Change your shareholding so your wife is no longer a shareholder. She has to sell the shares to you. She can still be director or company secretary which is prudent in case something unfortunate happens.

4. Ensure your working practices are out of IR35 - make sure the client doesn't regard you as part of the furniture and keep evidence.

[smokie]

I am paid a salary by my Ltd Co which is contracted to a third party appointed by the company I ultimately work for. That third party has changed a few times during the course of the contracts, as the "end-user" company has changed it's supplier.

I started a 6 month contract in 2012 which then got extended a couple of times for short periods (between 1 - 3 months) and last March was given a 12 month contract. This has just been renewed for a further 12 months, 2 week notice period. I work as a project manager and have worked on different projects within the same area but for the past 6 months and through to the end of the new contract I am expecting to work on the same project.

My accountant is an online one which provides only basic services, they can provide a fuller service but at additional cost so I suspect if I am going to pay for advice they may not be the best source. Shareholdings in my Co are 90% me, 10% spouse.

My contracts have all been reviewed under an insurance I have and are deemed IR35 friendly. However I suspect that my working practices put me at medium risk at best, I don't score very highly if I answer the entity tests honestly!!

I'm 58 and I do not want the taxman coming after me in 5 years when I am either close to or in my retirement with a bill and a fine so want to play a fairly straight bat.

Right through this succession of contracts I have paid myself the "optimum" salary (a bit over £600 pm).

In 2012 - 2013 I paid a straight dividend of most of the profit (when the shareholding was 60/40), leaving some in the company. As spouse is marginal 40% tax payer this has caused no end of issues, with her now having a tax return to complete plus a bit of an investigation into her non-salary income. I was OK with this, I genuinely thought at the time that it would only last 6 months. Since then the IR35 rules have tightened so for 2013 - 14 I have again paid the optimal salary and taken legit expenses but am planning that the company will put the rest into a SIPP for me - this seems to have tax benefits (corp) and put the money beyond the reach of HMRC. Also makes up for the years I've not contributed since not being a permie. (I can use previous years allowances).

For 2014 - 15 I want to take additional money from the company, and not put any more into pension. Given that I am on long extensions, and am a bit risk averse, it's feeling like the only option is to go inside IR35. However I want to maximise my takings. So what scope is there for that while reducing my risk (exposure) to later investigation and liabilities? I'm thinking that the safest answer is just go with deemed salary, but quite honestly I may well not fall under IR35 (or at least a smart lawyer/accountant might get me off any liability) so I am loath to cough up lots of additional tax unnecessarily.

I suppose the answer is to get HMRC to rate my company/contract but I'd prefer some advice here before sticking my head above the parapet.

EDIT: also if paying deemed salary, are things like rail fares to office, home internet, mobile phone, new computer all legitimate expenses or do they all come out of the 5%?