CMV: IR35 Chapter 8 is just a deterrent

[soyoh30298]

Just a point Andy, that statement you've quoted is actually wrong. It's money owed, up to 100% penalty and interest.

Totally, for 100% back the stars should align in a way to make you the unluckiest man in the world.
Assuming the contract at least mentions substitution and no D&C, the most likely scenario is "I'm sorry Mr. Taxman" and the case is settled.
Now obviously for anyone reading, NLA, it's speculation. But there is a reason QDOS has the one of the highest profits margin in the whole of the UK.

[northernladuk]

This is the key to your initial question. I would think most contractors are not simply saving that money (the amount that could be at risk) and so it would mean liquidating other assets or otherwise obtaining the funds that you no longer have.

Just a point Andy, that statement you've quoted is actually wrong. It's money owed, up to 100% penalty and interest.

[andymalory]

The worst case is you have to pay the tax back (so if you saved that money, then you have it).

This is the key to your initial question. I would think most contractors are not simply saving that money (the amount that could be at risk) and so it would mean liquidating other assets or otherwise obtaining the funds that you no longer have.

[soyoh30298]

No, that's not the worst case - add in penalties and interest. And, for some, the fear in the back of the mind that HMRC will come knocking one day.

Totally agree, that's my point. (See post). Even if you consider the penalty (which is a multiplier of the tax due) + interest (which is not compounded thankfully). It's still mathematically better to go outside. It's like asking playing russian roullette for a $1m, 1/6 odds to die and yet many will still play that game. In IR35 case, nobody dies, goes to jail or anyting like that. And the odds are way less than 1/6. That brings us to the "fear in the back", and I 100% agree, that's an issue (you can't put a price on mental health), but that's exactly what a deterrent is.

[Paralytic]

The worst case is you have to pay the tax back (so if you saved that money, then you have it). And even for that to happen is a very very improbable route if the LTD has no money. Thus what is exactly the risk?

No, that's not the worst case - add in penalties and interest. And, for some, the fear in the back of the mind that HMRC will come knocking one day.

[soyoh30298]

They can pass the debt from the limited company to the contractor personally very easily....

I'm aware that there is a mechanism in place. The problem is that IR35 is such a grey area that proving fraud is near impossible.
Has that ever actually happened? I'm not aware of a single case in history.

Anyway, even if let's assume HMRC can 100% pass on the debt. My point is, that balance of probabiltiies is such, that it always make sense to self-assess as Outside IR35, because mathematically speaking the expected value (of the profit) outweighs the risk considerably.

[eek]

What's the point though? If LTD has no money, they just waste their time, for what? Just to show off?

They can pass the debt from the limited company to the contractor personally very easily....

[soyoh30298]

Chapter 8 works because it pins the blame on the contractor so HMRC has someone suitable on which to pin the bill.

The problem is that Chapter 8 is very hard work for HMRC to chase so outside of some areas (Sports Journalism / TV presenters) HMRC haven't got a process that makes chasing things up easy.

What's the point though? If LTD has no money, they just waste their time, for what? Just to show off?

Slightly different way of thinking. Is it not something to be worried about because a vast majority has toed the line so it's not been worth chasing by HMRC. The flip side would be if no one cared and just carried on like permies then HMRC would have had a very easy target to address much earlier and with much more gusto?

For example, if many people didn't adhere to tax laws and were all in the practice of tax evasion wouldn't HMRC be a lot firmer on it with a bigger response? We don't get investigated much because a majority don't do it. If they did it would be anarchy.
Same could be said for speeding, most don't do it so there isn't that much enforcement action but if everyone sped there would be a camera on every corner.

Could it be argued it's because of those that haven't cared about it we're still feeling this pain?
HMRC thinks that only about 10% of contractors properly operate their PSC Outside IR35, and the rest are bogus, so it is a widespread phenomenon they can't do anything about (hence why Chapter 10 was needed, because large businesses can't easily close their companies to avoid liability).

ie. the chances of being investigated are low, but the impact of that happening is very high.

I would argue that the impact is not high enough given the low chances for it to not be beneficial (i.e. blanket Outside).
The worst case is you have to pay the tax back (so if you saved that money, then you have it). And even for that to happen is a very very improbable route if the LTD has no money. Thus what is exactly the risk?

[eek]

Chapter 8 works because it pins the blame on the contractor so HMRC has someone suitable on which to pin the bill.

The problem is that Chapter 8 is very hard work for HMRC to chase so outside of some areas (Sports Journalism / TV presenters) HMRC haven't got a process that makes chasing things up easy.

[Paralytic]

Same could be said for speeding, most don't do it so there isn't that much enforcement action but if everyone sped there would be a camera on every corner.

Not a great example

In 2018:

• 46% of cars exceeded the speed limit on motorways
• 52% of cars exceeded the speed limit on 30mph roads

https://www.gov.uk/government/statis...t-britain-2018

[Paralytic]

It's one of those "it's not worth worrying about until it is".

ie. the chances of being investigated are low, but the impact of that happening is very high.

[northernladuk]

Slightly different way of thinking. Is it not something to be worried about because a vast majority has toed the line so it's not been worth chasing by HMRC. The flip side would be if no one cared and just carried on like permies then HMRC would have had a very easy target to address much earlier and with much more gusto?

For example, if many people didn't adhere to tax laws and were all in the practice of tax evasion wouldn't HMRC be a lot firmer on it with a bigger response? We don't get investigated much because a majority don't do it. If they did it would be anarchy.
Same could be said for speeding, most don't do it so there isn't that much enforcement action but if everyone sped there would be a camera on every corner.

Could it be argued it's because of those that haven't cared about it we're still feeling this pain?

[soyoh30298]

Hey,

I've been reading this forum for a while, and I have been contracting for many years, never really cared much about IR35.
I'd like to understand where does all this fear and concern about this topic comes from?
Now I do understand that Chapter 10 changed the rules a little bit, but going back to Chapter 8 where SDS is on the contractor.
Say I pay 30% by determining myself outside rather than 50% tax for being inside. The odds to be investigated are small, so I'd expect
the mathematical expected value of the profit to be E = p*(T*1.5) - (1-p)*T, where p - probability of getting caught, T- difference in tax paid. (1.5 for penalties)
Tax in that case = 0.2*Profit. By my estimates, as long as p < 40%, it always make sense just to go outside, since E > 0.
Are the odds of being investigated and lose even close to 40%?
And even then, LTD has no money so HMRC gets nothing (has it ever happened in history for IR35 case for director to pay out?)

Conclusion:

IR35 Chapter 8 is just a deterrent that created a bunch of firms, insurances, accountants etc. to milk contractors.
But in reallity that's not something to be worried about.