Salary or Monthly Dividends

[nodric]

There was a case last year that HMRC won at a first tier tribunal case; namely PA Holdings, whereby dividends were challenged as disguised remuneration. Whereby PA Holdings were not structured in the typical freelancer / contractor Limited Company manner, what is to stop the revenue applying it to this market?

An attitude to risk should be considered when setting a salary level. People adverse to risk may wish to consider a higher salary to support their living expenses. Ideally, the lower the salary the more infrequent the dividends.

Thanks for the informative post! The case you note does indeed show there is a risk of ‘disguised remuneration’.

The good news for me, is that as long as the contractors are not employees of the company in which they may hold shares, then dividend income can never be subjected to this test.

I surmise, guess even, that hector is less virulent about chasing down one man bands, as he is bigger companies who practise some level of ‘disguised remuneration’. It’s not to say the risk for one man bands isn’t there, it’s just much more work for smaller gains.

Of course when an inspection comes along, as it always does, then the figures need to be reasonable. If you live in a house with a moat, then 5K a year salary is going to suggest avoidance, however, if you live in a 2 bed terrace, you’ll probably be fine. As you state, "an attitude to risk" is needed.

[Sergeant Murphys Cosh]

Of course when an inspection comes along, as it always does, then the figures need to be reasonable. If you live in a house with a moat, then 5K a year salary is going to suggest avoidance, however, if you live in a 2 bed terrace, you’ll probably be fine. As you state, "an attitude to risk" is needed.

A genuine freelancer cannot be accused of avoidance. A genuine freelancer is always outside of IR35.

He is an entrepreneur (in business on his own account) engaged in the same risks as other entrepreneurs, and as such is entitled to receive his remuneration in the same way as other entrepreneurs.

If you are a genuine freelancer (ie; entrepreneur), you are entitled to structure your remuneration however you wish, choosing your salary/dividend split as you see fit (indeed, you do not even need to take a salary if you wish. However, since salary is treated as an expense, a basic salary becomes a more tax-efficient way of receiving that remuneration than a dividend of the same amount).

If however, you are not a genuine freelancer and are one of those heinous people seeking to avoid, then the anti-avoidance legislation commonly known as IR35 is applied and you are no longer entitled to any dividends at all.




Therefore in conclusion, I would guess that the taking of dividends in preference to salary under any arrangement (ie; a one-man band MyCo, or some collective solution) is likely to be treated as avoidance if you yourself are not considered to be a genuine entrepreneur, but are instead only seeking to avoid.

Therefore, it is not the scheme per se that would be classed as an avoidance scheme, but each individual engaged in it judged to be genuine freelancer/entrepreneur or not.

[SallyPlanIT]

you do not even need to take a salary if you wish. However, since salary is treated as an expense, a basic salary becomes a more tax-efficient way of receiving that remuneration than a dividend of the same amount).
.

You need to pay a salary up to the lower earnings level (currently £5725) for employers NICs otherwise your state pension will not be contributed to, for those that it applies to. Voluntary contributions cost you the person, and are not tax deductible whereby the company claims tax relief and NICs.

[Coalman]

A genuine freelancer cannot be accused of avoidance. A genuine freelancer is always outside of IR35.

He is an entrepreneur (in business on his own account) engaged in the same risks as other entrepreneurs, and as such is entitled to receive his remuneration in the same way as other entrepreneurs.

If you are a genuine freelancer (ie; entrepreneur), you are entitled to structure your remuneration however you wish, choosing your salary/dividend split as you see fit (indeed, you do not even need to take a salary if you wish. However, since salary is treated as an expense, a basic salary becomes a more tax-efficient way of receiving that remuneration than a dividend of the same amount).

If however, you are not a genuine freelancer and are one of those heinous people seeking to avoid, then the anti-avoidance legislation commonly known as IR35 is applied and you are no longer entitled to any dividends at all.




Therefore in conclusion, I would guess that the taking of dividends in preference to salary under any arrangement (ie; a one-man band MyCo, or some collective solution) is likely to be treated as avoidance if you yourself are not considered to be a genuine entrepreneur, but are instead only seeking to avoid.

Therefore, it is not the scheme per se that would be classed as an avoidance scheme, but each individual engaged in it judged to be genuine freelancer/entrepreneur or not.

Please define the difference in a manner that is acceptable to HMRC and that we can all apply to our operating model. I think that you will find HMRC has its own definition that may not match yours.

[nodric]

A genuine freelancer cannot be accused of avoidance. A genuine freelancer is always outside of IR35.

He is an entrepreneur (in business on his own account) engaged in the same risks as other entrepreneurs, and as such is entitled to receive his remuneration in the same way as other entrepreneurs.

If you are a genuine freelancer (ie; entrepreneur), you are entitled to structure your remuneration however you wish, choosing your salary/dividend split as you see fit (indeed, you do not even need to take a salary if you wish. However, since salary is treated as an expense, a basic salary becomes a more tax-efficient way of receiving that remuneration than a dividend of the same amount).

If however, you are not a genuine freelancer and are one of those heinous people seeking to avoid, then the anti-avoidance legislation commonly known as IR35 is applied and you are no longer entitled to any dividends at all.

Therefore in conclusion, I would guess that the taking of dividends in preference to salary under any arrangement (ie; a one-man band MyCo, or some collective solution) is likely to be treated as avoidance if you yourself are not considered to be a genuine entrepreneur, but are instead only seeking to avoid.

Therefore, it is not the scheme per se that would be classed as an avoidance scheme, but each individual engaged in it judged to be genuine freelancer/entrepreneur or not.

There are people far more knowledgeable than me on CUK, that can discuss IR35, but from my own understanding I think some of your comments may be confused.

A long time since I’ve been called heinous! We all try and avoid tax, it’s why we have accountants, and why we have expenses. Avoidance is not illegal, and provided you utilise the legislation effectively, there is nothing heinous about doing so at all.

A genuine freelancer should have the freedom to work for multiple clients at the same time, and to choose how he delivers service (dates times etc). Indeed a Ltd Co should be able to accept a contract, but then deploy appropriate staff to fulfil that contract. If the contract restricts that to a single resource, working a fixed working week, with employee like reporting and restrictions, and no right of substitution, then are you actually an employee in disguise?

I think this is the essence of IR35, and not specifically general tax avoidance by using offshore companies, or EBTs as such like, although of course disguised employment is a form of tax avoidance.

Few contractors can claim true IR35 compliance, even with rights of assignment clauses and other IR35 avoidance measures, although most achieve a level of compliance and avoid any problems. Perhaps you consider IR35 avoidance heinous as well?

I agree, some tax evasion schemes out there are non compliant, and therefore very high risk, and so a better solution is needed. Acting as a collective, and starting a true consultancy structured business could be considered entrepreneurial. If each shareholder had a stake in its success, and was able to contribute to its development, then they could also be considered true freelancers in your definition.

Yes it is also used to utilise legislation to avoid tax, but why is that wrong? It's not illegal!

To simply dismiss all alternative ways of working, other than give as much as possible to HRMC, or whoever your tax controller is, to me, is very short sighted.

“Kill the machines” said the Luddites.

[Sergeant Murphys Cosh]

You need to pay a salary up to the lower earnings level (currently £5725) for employers NICs otherwise your state pension will not be contributed to, for those that it applies to. Voluntary contributions cost you the person, and are not tax deductible whereby the company claims tax relief and NICs.

Good point.

Though it's actually £5,715 for 2010-2011. HM Revenue & Customs: Rates and thresholds for employers

[norrahe]

While it's useful to discuss these, if we're unsure then we need to talk to our accountants if we are unsure of anything.

[nodric]

While it's useful to discuss these, if we're unsure then we need to talk to our accountants if we are unsure of anything.

Wise words indeed. It seems to have descended into the philosophy, or rights and wrongs of avoidance, something I wanted to avoid, but hey ho

[SallyPlanIT]

Good point.

Though it's actually £5,715 for 2010-2011. HM Revenue & Customs: Rates and thresholds for employers

OOPS! Thank you for pointing that out

[Sergeant Murphys Cosh]

A long time since I’ve been called heinous!

Don't worry. It was only said tongue-in-cheek and not aimed at anyone.

We all try and avoid tax, it’s why we have accountants, and why we have expenses.

No it's not. I have an accountant & incur expenses because I am running a genuine business. The expenses are real expenses incurred in performance of my genuine freelance job, and as such I need an accountant to manage my genuine freelance affairs properly.

As a genuine freelancer, this is not tax avoidance; it is running a genuine business.

If however, you say to me you believe this arrangement to be avoidance, what you are really saying is that you are not a genuine freelancer, but are something else masquerading as a freelancer in order to gain the tax advantages only officially available to such freelancers/entrepreneurs. (Specifically, by taking dividends you are avoiding PAYE/NICs).

Avoidance is not illegal, and provided you utilise the legislation effectively, there is nothing heinous about doing so at all.

No really, that heinous remark was just said tongue-in-cheek.

A genuine freelancer should have the freedom to work for multiple clients at the same time, and to choose how he delivers service (dates times etc). Indeed a Ltd Co should be able to accept a contract, but then deploy appropriate staff to fulfil that contract. If the contract restricts that to a single resource, working a fixed working week, with employee like reporting and restrictions, and no right of substitution, then are you actually an employee in disguise?

A judge looks at all factors. If I were ever to be hauled up before a panel, I wouldn't start my defence by showing my current contract and going through the MOO, Substitution and Control points, even if they were all in order. I would begin by showing my history of past contracts. How I move about to get work. How I stay in temp. accommodation in order to perform the duties of each contract. Maybe only then, would I move on to the more technical points.

There is no hard & fast test to determine your employment status. Case history plays a huge part.

Anybody with an 'IR35-proof' contract (there is no such thing, but many consider having the MOO, Substitution and Control points as some kind of safe-guard), but who doesn't work according to it, will ultimately fail the IR35 test. Equally, you could have a 'non-IR35 proof' contract (without the MOO, Substitution and Control points), and work outside IR35-like conditions (those three points (and more) once again), and ultimately be deemed outside of IR35. [A bit stupid on your part if you did that, since you've probably made more hassle for yourself than need be, but nonetheless it makes my point that it's your working relationship with your client/employer than helps determine your status, rather than some easy-to-have-fiddled clauses inserted judicially into your contract].

I think this is the essence of IR35, and not specifically general tax avoidance by using offshore companies, or EBTs as such like, although of course disguised employment is a form of tax avoidance.

It doesn't matter what vehicle you use to provide your services through, your employment status is what counts. Ie; are you a genuine freelancer in business on his own account, or a permie. seeking to obtain the tax advantages of the former when you're not really allowed to?

Hector has said many times that using offshore or foreign companies makes no difference to IR35. It's what YOU are that counts, and the fact that the work is subject to UK legislation if done in the UK.

Perhaps you consider IR35 avoidance heinous as well?

I wish I hadn't said that now. I was mocking Hector and being sarcastic by using the 'H' word, not meaning it literally.

I agree, some tax evasion schemes out there are non compliant, and therefore very high risk, and so a better solution is needed.

Surely all tax evasion schemes are non-compliant, that's why they're called 'evasion'.

Acting as a collective, and starting a true consultancy structured business could be considered entrepreneurial. If each shareholder had a stake in its success, and was able to contribute to its development, then they could also be considered true freelancers in your definition.

Yes, it could be. But again, all factors would be looked at.

Yes it is also used to utilise legislation to avoid tax, but why is that wrong? It's not illegal!

It may not be illegal, but you don't want to go to all that effort and not reap the rewards, do you?

Whilst not illegal, you would get fined & penalised, and also have to pay back the initial amounts avoided if your cunning scheme turned out not to be quite so cunning after all.

To simply dismiss all alternative ways of working, other than give as much as possible to HRMC, or whoever your tax controller is, to me, is very short sighted.

I am totally on your side.




[Actually, the 'heinous' references comes from when you mentioned in a different thread that the Belgian Hector is a low-paid miserable excuse of a creature, who hates us all with a vengance. That is how I imagine they would describe us, assuming English were their native language].