Is previous tax paid taken into account on an IR35 assessment?

[realaledrinker]

Should the Taxman ever come a-calling claiming my contract is within IR35 and raises an assessment, would all taxes already paid which were generated from the contract so far be taken into account?

I’m thinking Corporation Tax and Income Tax paid on dividends (not forgetting the 20% irrecoverable VAT on a finance industry contract but let’s exclude that).

If my contact earned say £50K fees, PSC pays circa £10K corporation tax and pays out 100% of what’s left in divis, then I calculate a total tax bill of around £11.9K. If the £50K has been earned as an employee, I would pay around £10.9K in tax and NI (oversimplification granted).

Same assumptions on £100K gives me £29.2K total tax PSC route and £32.5K employed. So would the Taxman just come after the difference?

[malvolio]

I asked that question around 20 years ago. I've yet to see an answer. HMRC won't tell us because "tax affairs are strictly confidential".

[northernladuk]

Plus interest, plus penalties of up to 100% of tax owed a well surely?

[Blert596]

Plus interest, plus penalties of up to 100% of tax owed a well surely?

Are the interest and penalties discretionary, based on if HMRC think you were being deliberately misleading or very very naughty? Have there been any penalty cases?

[northernladuk]

Are the interest and penalties discretionary, based on if HMRC think you were being deliberately misleading or very very naughty? Have there been any penalty cases?

IR35 enquiry by HM Revenue and Customs - GOV.UK

[jamesbrown]

Not necessarily, because there are different time limits to correct mistakes related to different taxes, and that interacts with the period that has elapsed since the disputed period. So, strictly speaking, you may not be able to correct the mistake and hence claim relief.

If HMRC wants to play hardball, they can. See, the Ackroyd case, for example, where the disputed tax was vastly different according to each party. But no one knows the outcome of these cases. In principle, it can be referred back to the tribunal for a decision by the judge.

[Hobosapien]

Logically HMRC are rewriting history when they make a determination that IR35 should have applied for a specific period, where the type of tax paid was wrong (corp/divi tax was paid when it should have been employee related taxes), so to address that one would hope that HMRC look at the amount received against what they expect to have been paid and request the balance.

Under normal circumstances I can't see how corp tax/divi tax could outweigh employee related taxes, otherwise IR35 wouldn't be needed, so no relief needs claiming for already paid tax as you wouldn't be getting a refund.

This is one for the accountants that have dealt with IR35 cases where the already submitted accounts need re-evaluating and likely re-submitting with the corrections to meet the type of tax being requested by HMRC, to say if logic stands up to HMRC reasoning. That's not a given.

[jamesbrown]

so to address that one would hope that HMRC look at the amount received against what they expect to have been paid and request the balance.

I think we can say with a good degree of certainty, based on the evidence available, that HMRC don't do this - look at tribunal proceedings for evidence of disputes about quantum. This isn't really surprising; it's a dispute.

However, what is perhaps more important is the ability to refer back to a tribunal judge on quantum, which should lead to a more balanced view. In practice, I think the effect will generally be as you describe, but it is far from certain - look to the scheme folks for the shenanigans there w/r to tax due (sure, these vehicles shouldn't have been used, but their treatment has been pretty brutal, to the fullest extent of the law and arguably beyond).

[BlueSharp]

I think we can say with a good degree of certainty, based on the evidence available, that HMRC don't do this - look at tribunal proceedings for evidence of disputes about quantum. This isn't really surprising; it's a dispute.

However, what is perhaps more important is the ability to refer back to a tribunal judge on quantum, which should lead to a more balanced view. In practice, I think the effect will generally be as you describe, but it is far from certain - look to the scheme folks for the shenanigans there w/r to tax due (sure, these vehicles shouldn't have been used, but their treatment has been pretty brutal, to the fullest extent of the law and arguably beyond).

The problem with the scheme folk is their fees never went on any tax let alone the wrong tax.

My understanding is if you can show due diligence i.e. contract reviews that can be used to prevent penalties being applied or even having the liability transferred from PSC to personal tax, there is no LTD protection for the scheme users. IMO a worse case scenario where the PSC has been diligent and then lost at a tribunal it would be liable for the contract length or 4 years which ever is shorter worth of back tax for the corrected amount.

[jamesbrown]

The problem with the scheme folk is their fees never went on any tax let alone the wrong tax.

My understanding is if you can show due diligence i.e. contract reviews that can be used to prevent penalties being applied or even having the liability transferred from PSC to personal tax, there is no LTD protection for the scheme users. IMO a worse case scenario where the PSC has been diligent and then lost at a tribunal it would be liable for the contract length or 4 years which ever is shorter worth of back tax for the corrected amount.

I agree, but with the caveat that it's untested in this particular area of tax law, AFAIK. There is a high bar for transfer of debt, but that's another way of saying there is a bar. Certainly, if you've had contract reviews and you are self-evidently not closing your company to try to circumvent paying tax, then it seems remote but, as always, evidence matters, so record things.

I always point to Jessica's blog on this because it's a good summary, albeit a few years old now:

IR35 and Personal Liability - can HMRC proceed against an individual? - Whitefield Tax Limited - Isle of Wight Accountants - IR35 specialists