IR35 Worst Case Scenario?

[shippwreck]

Hey Guys,

Hope this isn't answered else where, couldn't find it if it is. So here's the scenario that's worrying me...

If we assume that in setting up the limited company i have done everything in my power to do it "correctly" and have bought the correct memberships and the correct insurances and in taking the contract i have done the sensible things like getting it checked for IR35 compliancy etc.

Now lets say 2 years down the line, Mr Tax man comes along looks at my contracts etc and after the necessary legal processes picks out my first contract as actually not being IR35 compliant... what happens to me???

I'm hoping the answer is going to be that they work out how much Tax is owed, i pay and thats that... Is that right, or are there criminal proceedings as well?

I suppose i'm really asking what is the worst possible scenario? (if we assume i have enough money to pay whatever the bill would be)

Cheers

Nervous Newb (Matt)

[shippwreck]

LOL, i have, its just that unknown part that niggles at me! I've actually spoken about it with my wife tonight as well and feel a lot better about it, but you know, there's always that worry in the back of your mind.

I guess contracting for a living, its just something that you have to get used to. Hey i haven't even started worrying about what i'm gonna do at the end of this contract yet

Cheers

[TheMonkey]

Ok lets use the following to describe it:

inserts into and you go

[kirk]

Hmmm, what's stopping any contractor taking out PCG+ insurance and claiming to be outside IR35 even when it's fairly obvious that they're disguised employee?

[TheMonkey]

Works for me.

You ain't seen me - right!

[Mordac]

Hmmm, what's stopping any contractor taking out PCG+ insurance and claiming to be outside IR35 even when it's fairly obvious that they're disguised employee?

I'm not sure, but if you're a blatant insider (as in inside IR35) I doubt they'll bust a gut to try and prove otherwise. Quite the opposite in fact, thay have a very good winning streak going at the moment, and I assume they want to keep it that way.

[Denny]

The advice above is silly and dangerous. If you're working conditions are clearly inside IR35 but your contract terms with the EB outside, and you've done nothing to ensure or check before starting that the contract was back-to-back with the client as well as the EB, I doubt whether any insurance company would honour the claim.

Insurance for IR35 is no different than any other. If you're seen to be negligent or haven't put reasonable steps in place to ensure your contract terms are realised once the role starts, the insurers will simply refuse to pay out.

[rootsnall]

The advice above is silly and dangerous. If you're working conditions are clearly inside IR35 but your contract terms with the EB outside, and you've done nothing to ensure or check before starting that the contract was back-to-back with the client as well as the EB, I doubt whether any insurance company would honour the claim.

Insurance for IR35 is no different than any other. If you're seen to be negligent or haven't put reasonable steps in place to ensure your contract terms are realised once the role starts, the insurers will simply refuse to pay out.

If I understand it correctly then the PCG+ 'Insurance' is just a policy to cover your legal costs in any IR35/NI investigation, it will not pay your tax if you lose. I did see some schemes saying they would pay your tax on loss but I'd be very wary of this if the IR35 tide turns and the taxman starts winning cases. I have tried to keep tabs on how much I would owe in the worst case scenario ( but no idea on fines !? ) but this gets increasingly difficult as time goes by.

[Emperor Dalek]

To the OP: to answer your original question of what's the worst that could happen should your original contract be deemed to be inside IR35 some years down the line and the various legal processes uphold this decision.

Well, the value of your original contact will be subject to an IR35 calculation (total amount, less 5%, less allowable expenses) and PAYE/NI calculated on that as if you were an employee. There will also be employers' NI to pay.

Interest will also be charged on that amount from the day it became due (the rate is rather high, well above the BoE base rate, possibly 8% or so).

Then there is the matter of penalties. HMRC have stated in the past that they would not seek penalty payments (which can be as much as 100% of the tax due) during a bedding in period for IR35 in cases where the taxpayer acted in good faith and had taken steps that led them to believe they were not caught by IR35.

Criminal charges are highly, highly unlikely to materialise, unless you were involved in a highly concerted effort to brutally defraud the state and/or were involved in VAT fraud.

[boredsenseless]

To the OP: to answer your original question of what's the worst that could happen should your original contract be deemed to be inside IR35 some years down the line and the various legal processes uphold this decision.

Well, the value of your original contact will be subject to an IR35 calculation (total amount, less 5%, less allowable expenses) and PAYE/NI calculated on that as if you were an employee. There will also be employers' NI to pay.

Interest will also be charged on that amount from the day it became due (the rate is rather high, well above the BoE base rate, possibly 8% or so).

Then there is the matter of penalties. HMRC have stated in the past that they would not seek penalty payments (which can be as much as 100% of the tax due) during a bedding in period for IR35 in cases where the taxpayer acted in good faith and had taken steps that led them to believe they were not caught by IR35.

Criminal charges are highly, highly unlikely to materialise, unless you were involved in a highly concerted effort to brutally defraud the state and/or were involved in VAT fraud.

Agree with the emperor.

The worst that should happen is that they find you to be IR35 and recalculate the tax due accordingly. They'll then apply interest to the outstanding amount for the period it has been deemed to be owed.

You'll probably also get a small penalty to make an example and disuade others, however if you don't co-operate or they discover that you wilfully attempted to avoid tax rather than believing you were ok and operating legitametly that way the penalty will be very harsh.

Visits to the government prison will be extremely unlikely unless of course you owe loads and you can't pay and can't agree a repayment schedule, even then though the best chance they have of getting their money is if you go to work so they may decide instead to put a charge on your income similar to that used in bankruptcy cases.

HOWEVER and I can't stress this enough, I only speak from a position of having read numerous threads on this before, if you are really concerned I'd speak to an expert - they'll pop up soon enough on here.