PDA

View Full Version : Nightmare becomes reality



regron
7th March 2018, 10:29
And so it starts !!

http://www.itcontractor.com/contractors-ir35-hmrc-worst-nightmare-becomes-reality-armageddon/

northernladuk
7th March 2018, 10:38
Bit overkill that isn't it.

malvolio
7th March 2018, 10:43
It's Gerry. Best ignored.

regron
7th March 2018, 10:44
Wouldn't put it past them though.

oliverson
7th March 2018, 10:53
keep seeing mention of contractors having to close down their limited due to these changes. Is that really feasible - close them down and just walk away, possibly owing tax, etc?

DaveB
7th March 2018, 11:02
So a hyperbolic article predicting the demise of the Ltd. Co. contractor followed by an advert for a couple of no doubt related Umbrella companies.

Hmm...

A slightly less hysterical take on it here.

https://www.contractoruk.com/news/0013481pscs_must_keep_confident_and_carry_despite_ ackroyd_case.html?utm_source=NL&utm_medium=News&utm_campaign=Comment

NotAllThere
7th March 2018, 11:40
keep seeing mention of contractors having to close down their limited due to these changes. Is that really feasible - close them down and just walk away, possibly owing tax, etc?

No, because it's a personal tax.

b0redom
7th March 2018, 11:42
Erm. I've not heard anything regarding retrospective investigations beyond anecdotal panicking.

Sure HMRC may look at your current status and say - you're a disguised employee you're liable for extra tax on your current contract, but I've seen nothing to suggest that they will use that as a tool to go back and look at previous contracts?

poorautojobber
7th March 2018, 13:30
It may not be true but it could be and that's the point. Really looking forward to the fun beginning for the rest of us!

b0redom
7th March 2018, 16:07
Monkeys might fly out of my butt, but I bet they don't. Unless there's any supporting evidence (and I'm yet to see any), screaming about retrospective taxation is just FUD at this stage.

madame SasGuru
7th March 2018, 16:25
Monkeys might fly out of my butt, but I bet they don't. Unless there's any supporting evidence (and I'm yet to see any), screaming about retrospective taxation is just FUD at this stage.

This is a timing game - HMRC can't do anything until Self Assessment returns are in for 2016/17 (showing income was mainly received via dividends) and probably 2017/18 (showing income was received via PAYE).

And as you will notice with the BBC cases at the moment all this stuff takes a very long time which given HMRC want things rolled out in the private sector next April means HMRC want to do leave things as late as possible.

poorautojobber
7th March 2018, 18:18
Makes sense about the results of SA season and also no evidence they are looking but I stand by the fact if they choose to inspect a large engager for IR35 compliance and want to look at the details of your former PSC theirs nothing stopping them.
I suppose theirs the question of transfering the liability from a company that doesn't exsists anymore but that hasnt really stopped them in recent history.
All worst case made up scenarios but still....

Acme Thunderer
7th March 2018, 18:24
Erm. I've not heard anything regarding retrospective investigations beyond anecdotal panicking.

Sure HMRC may look at your current status and say - you're a disguised employee you're liable for extra tax on your current contract, but I've seen nothing to suggest that they will use that as a tool to go back and look at previous contracts?

I would be a little surprised if it did not cross HMRC mind. Contractor has been caught wrongly claiming outside IR35 on a contract, have they being doing the same on previous contracts for different clients? Having said that because they would be different contracts HMRC would have to go through the evidence gathering/tribunal loop again with no guarantee of the same result. In fact the contractor should be wise to their tactics and prepare a better defence.

jamesbrown
7th March 2018, 18:27
No, because it's a personal tax.

False.

madame SasGuru
7th March 2018, 18:51
I would be a little surprised if it did not cross HMRC mind. Contractor has been caught wrongly claiming outside IR35 on a contract, have they being doing the same on previous contracts for different clients? Having said that because they would be different contracts HMRC would have to go through the evidence gathering/tribunal loop again with no guarantee of the same result. In fact the contractor should be wise to their tactics and prepare a better defence.

Have you met your typical contractor - the first time they will know there is a problem will be when HMRC sends their first letter and a lot will groan and eventually pay up because they don't have IPSE membership or QDOS insurance and won't know what to do.

HMRC would then drop all cases where the contractor wrote a sensible response but even those initial letters would raise them a fair bit of money for zero effort.

WordIsBond
7th March 2018, 18:57
No, because it's a personal tax.
Company liability. They'd have to lift the corporate veil, not an easy thing to accomplish.

craigy1874
8th March 2018, 09:25
No, because it's a personal tax.

It's not really, its opened through an employer compliance review, so no company, no possibility of an employer compliance review.

webberg
8th March 2018, 17:25
Company liability. They'd have to lift the corporate veil, not an easy thing to accomplish.

Apologies for straying from my usual haunts.

Where a liability arises on a company for PAYE, or in this instance a sum equivalent to PAYE, where HMRC is in time to raise a Reg 80 determination, (limited presently to 4 years from the end of the tax year in question), then this goes to the company and is a corporate liability.

Where the company is "close" - broadly owned and controlled by 5 or fewer people - if the company fails to pay, then the liability falls to the directors. In some instances it can go to the employee, if that employee is not a director.

This is a rare instance of piercing the corporate veil.

In some cases recently, HMRC has been stepping in and preventing such close companies from being struck off and/or have made a claim on the liquidator for money due.

jamesbrown
8th March 2018, 19:28
Apologies for straying from my usual haunts.

Where a liability arises on a company for PAYE, or in this instance a sum equivalent to PAYE, where HMRC is in time to raise a Reg 80 determination, (limited presently to 4 years from the end of the tax year in question), then this goes to the company and is a corporate liability.

Where the company is "close" - broadly owned and controlled by 5 or fewer people - if the company fails to pay, then the liability falls to the directors. In some instances it can go to the employee, if that employee is not a director.

This is a rare instance of piercing the corporate veil.

In some cases recently, HMRC has been stepping in and preventing such close companies from being struck off and/or have made a claim on the liquidator for money due.

I think you're wrong, but I'd be happy to be corrected if you could cite the specific legislation that allows for a more straightforward transfer of PAYE debt in the context of a close company, which I agree is defined in law. The transfer of debt to an employee is dealt with in Regulation 72 of the PAYE Regulations 2003 (different for NI). Regulation 80 deals with the employer.

As far as I'm aware, the case law also shows the opposite to be true, providing the director was not acting willfully. For example:

https://www.rpc.co.uk/perspectives/tax-take/tribunal-rejects-hmrcs-attempt-to-transfer-paye-liability-to-employee

Acting without reasonable care would be incredibly difficult to demonstrate in the context of IR35, given the subjectivity involved, especially if a professional contract review were sought.

NotAllThere
9th March 2018, 05:50
keep seeing mention of contractors having to close down their limited due to these changes. Is that really feasible - close them down and just walk away, possibly owing tax, etc?
No, because it's a personal tax.
False.



Technically yes, but it works like a personal tax in practice due to its nature. As webberg says:


Where a liability arises on a company for PAYE, or in this instance a sum equivalent to PAYE, where HMRC is in time to raise a Reg 80 determination, (limited presently to 4 years from the end of the tax year in question), then this goes to the company and is a corporate liability.

Where the company is "close" - broadly owned and controlled by 5 or fewer people - if the company fails to pay, then the liability falls to the directors. In some instances it can go to the employee, if that employee is not a director.

This is a rare instance of piercing the corporate veil.

In some cases recently, HMRC has been stepping in and preventing such close companies from being struck off and/or have made a claim on the liquidator for money due.

See also here (https://www.contractoruk.com/ir35/contractors_questions_can_i_dodge_ir35_by_winding_ 4706.html) and here (https://www.contractoruk.com/news/0012659contractors_dont_get_lumbered_your_limited_ companys_tax_bill.html). Note further that if you're suspected of shutting your company down to avoid IR35 liability, then you risk being charged with evasion and/or fraud.

jamesbrown
9th March 2018, 09:58
Technically yes, but it works like a personal tax in practice due to its nature. As webberg says:


No, it doesn't work like a personal tax in practice. Again, this is straightforwardly false, unless you or webberg can cite the legislation and case law of which I am unaware.


See also here (https://www.contractoruk.com/ir35/contractors_questions_can_i_dodge_ir35_by_winding_ 4706.html) and here (https://www.contractoruk.com/news/0012659contractors_dont_get_lumbered_your_limited_ companys_tax_bill.html). Note further that if you're suspected of shutting your company down to avoid IR35 liability, then you risk being charged with evasion and/or fraud.

So, the first point you're making is an entirely separate point. I agree that a debt cannot be avoided simply by closing a company. However, closing an indebted company does not automatically transfer the liability to a director or employee, which is the leap that you seem to be making. The company would need to be reinstated and the debt transferred. The same rules apply.

Did you read the second article you linked above? I believe it says precisely what I have been saying. :laugh


As for those contractors operating their own personal service company, if HMRC mounts a challenge under IR35, the tax authority again must show that the employer wilfully failed to deduct the tax. It is therefore essential that the contractor is able to demonstrate that, even if tax was not deducted, this was not done deliberately and that the appropriate steps had been taken to comply with IR35.

It would need to be shown, under PAYE Regulation 72, that the director/employee acted willfully. Good luck with that in the context of IR35 if the appropriate due diligence has been done. Again, happy to be corrected if you can cite the legislation or case law that contradicts this. Also, the legislation can change.

webberg
9th March 2018, 10:07
I think you're wrong, but I'd be happy to be corrected if you could cite the specific legislation that allows for a more straightforward transfer of PAYE debt in the context of a close company, which I agree is defined in law. The transfer of debt to an employee is dealt with in Regulation 72 of the PAYE Regulations 2003 (different for NI). Regulation 80 deals with the employer.

As far as I'm aware, the case law also shows the opposite to be true, providing the director was not acting willfully. For example:

https://www.rpc.co.uk/perspectives/tax-take/tribunal-rejects-hmrcs-attempt-to-transfer-paye-liability-to-employee

Acting without reasonable care would be incredibly difficult to demonstrate in the context of IR35, given the subjectivity involved, especially if a professional contract review were sought.

I accept that I failed to provide context.

My assumption was that HMRC raised assessments to back up a form of disguised remuneration scheme in Part 7A and therefore have available to them the rules there to transfer liability.

However, looking at the PAYE Regulations, section 81 is of help to HMRC and they have not given up on Reg 72 and the West case which is awaiting an Upper Tier Tribunal date.

The West case is interesting in that it was a "technical knock out" for the taxpayer decided on a casting vote. Until it has reached a similar result at a higher level, it would be unwise to rely upon it.

In West, there was no suggestion of disguised remuneration and I accept that my initial post was coloured by my normal work comprising pretty much nothing but that.

madame SasGuru
9th March 2018, 10:08
It would need to be shown, under PAYE Regulation 72, that the director/employee acted willfully. Good luck with that in the context of IR35 if the appropriate due diligence has been done. Again, happy to be corrected if you can cite the legislation or case law that contradicts this. Also, the legislation can change.

That's the thing - most of us on here won't have a problem. There is however a very large potential market of people who haven't got said due diligence. And anyone who was here in November 2016 - Feb 2017 was warned about the possible risk and how to mitigate it. Heck even some agencies followed that mitigation advice and set things up in such a way that their clients won't be impacted.

madame SasGuru
9th March 2018, 10:13
I accept that I failed to provide context.

My assumption was that HMRC raised assessments to back up a form of disguised remuneration scheme in Part 7A and therefore have available to them the rules there to transfer liability.

However, looking at the PAYE Regulations, section 81 is of help to HMRC and they have not given up on Reg 72 and the West case which is awaiting an Upper Tier Tribunal date.

The West case is interesting in that it was a "technical knock out" for the taxpayer decided on a casting vote. Until it has reached a similar result at a higher level, it would be unwise to rely upon it.

In West, there was no suggestion of disguised remuneration and I accept that my initial post was coloured by my normal work comprising pretty much nothing but that.

It's only a first-tier tribunal - it doesn't really determine anything. The question is has HMRC appealed?

malvolio
9th March 2018, 10:48
It's only a first-tier tribunal - it doesn't really determine anything. The question is has HMRC appealed?
Which bit of "waiting on an UTT" did you miss?

FWIW IR35 has always been a personal tax paid for by YourCo (which, incidentally, HMRC deems not to exist or at least not to be a relevant legal entity in this context). I feel I agree with webberg's viewpoint about where the liability goes if the company has faded from view for some reason.

madame SasGuru
9th March 2018, 10:57
Which bit of "waiting on an UTT" did you miss?

FWIW IR35 has always been a personal tax paid for by YourCo (which, incidentally, HMRC deems not to exist or at least not to be a relevant legal entity in this context). I feel I agree with webberg's viewpoint about where the liability goes if the company has faded from view for some reason.

From the article


Given the dissenting view of Ms O'Neil and the concerns that she expressed that the decision might enable owner managers of small businesses that are about to go into liquidation to make preferential payments to themselves at the expense of creditors such as HMRC, it would not be surprising if HMRC seek to appeal this decision to the Upper Tribunal.

and I read webberg's comment before the link and missed that an appeal had been registered.

jamesbrown
9th March 2018, 11:39
I accept that I failed to provide context.

My assumption was that HMRC raised assessments to back up a form of disguised remuneration scheme in Part 7A and therefore have available to them the rules there to transfer liability.

However, looking at the PAYE Regulations, section 81 is of help to HMRC and they have not given up on Reg 72 and the West case which is awaiting an Upper Tier Tribunal date.

The West case is interesting in that it was a "technical knock out" for the taxpayer decided on a casting vote. Until it has reached a similar result at a higher level, it would be unwise to rely upon it.

In West, there was no suggestion of disguised remuneration and I accept that my initial post was coloured by my normal work comprising pretty much nothing but that.

Yes, I understand where you're coming from, but the requirement to show that the director/employee acted willfully is quite clear, and the case is illustrative in that respect. It's a high bar, especially in the context of IR35.

jamesbrown
9th March 2018, 11:42
That's the thing - most of us on here won't have a problem. There is however a very large potential market of people who haven't got said due diligence. And anyone who was here in November 2016 - Feb 2017 was warned about the possible risk and how to mitigate it. Heck even some agencies followed that mitigation advice and set things up in such a way that their clients won't be impacted.

Sure, the contractor would need to show that they hadn't acted willfully and deliberately.

jamesbrown
9th March 2018, 11:48
FWIW IR35 has always been a personal tax paid for by YourCo

Again, this is straightforwardly and demonstrably false with reference to the ITEPA. The clue's in the name: intermediary. It has never been a personal tax.

I continue to be amazed at how many people confuse the criteria for establishing whether IR35 applies - namely to construct a hypothetical contract between the contractor and the end client, as a legal device - and the presence of the intermediary as a legal fact. Nothing within the ITEPA eliminates the intermediary or in any way shifts the liability. This is achieved through separate legislation, such as PAYE Reg 72, for which there are barriers to overcome. Difficult ones.

malvolio
9th March 2018, 12:09
Again, this is straightforwardly and demonstrably false with reference to the ITEPA. The clue's in the name: intermediary. It has never been a personal tax.

I continue to be amazed at how many people confuse the criteria for establishing whether IR35 applies - namely to construct a hypothetical contract between the contractor and the end client, as a legal device - and the presence of the intermediary as a legal fact. Nothing within the ITEPA eliminates the intermediary or in any way shifts the liability. This is achieved through separate legislation, such as PAYE Reg 72, for which there are barriers to overcome. Difficult ones.
Continue to be amazed. I'm am merely repeating the statement that has been consistently made by both HMG and various tax advisors and other bodies since 1999. I do not think it beyond the wit of HMRC and the courts to determine that an individual who has been found to be avoiding tax by pretending to be a non-employee should be liable for the debt created by his erstwhile company.

jamesbrown
9th March 2018, 12:28
Continue to be amazed. I'm am merely repeating the statement that has been consistently made by both HMG and various tax advisors and other bodies since 1999. I do not think it beyond the wit of HMRC and the courts to determine that an individual who has been found to be avoiding tax by pretending to be a non-employee should be liable for the debt created by his erstwhile company.

Continuing to be amazed.

Your emphatic presentation of the evidence to support your claims almost swayed me, but I marginally came down on the side of astonishment.

malvolio
9th March 2018, 13:31
Continuing to be amazed.

Your emphatic presentation of the evidence to support your claims almost swayed me, but I marginally came down on the side of astonishment.
Nevertheless, IR35 is a personal tax issue. If you have mis-declared your income on your SAR as outside IR35 and are then found to be inside, it is you personally who has not paid sufficient taxes and it is you personally who is liable for the shortfall (plus interest and any penalties, although the latter is unlikely). How you pay for it is your problem, and if YourCo has ceased to be, it is your money that will be used. And to close the loop, it is your personal tax return that will trigger an IR35 investigation, not YourCo's filed accounts.

That has always been the case. IR35 is not a corporate liability any more than PAYE is: in fact, to be entirely pedantic, IR35 is not a tax at all, it is an element in the calculation of personal PAYE and NICs owed.

jamesbrown
9th March 2018, 13:43
Nevertheless, IR35 is a personal tax issue. If you have mis-declared your income on your SAR as outside IR35 and are then found to be inside, it is you personally who has not paid sufficient taxes and it is you personally who is liable for the shortfall (plus interest and any penalties, although the latter is unlikely). How you pay for it is your problem, and if YourCo has ceased to be, it is your money that will be used. And to close the loop, it is your personal tax return that will trigger an IR35 investigation, not YourCo's filed accounts.

That has always been the case. IR35 is not a corporate liability any more than PAYE is: in fact, to be entirely pedantic, IR35 is not a tax at all, it is an element in the calculation of personal PAYE and NICs owed.

Tripe. You can keep asserting stuff all you'd like. Almost everything you've written there is false. An IR35 investigation could begin in a variety of ways, but generally through an Employer Compliance Review/Check of Employer Records.

Here's the PAYE 2003 Regulation 72 in original form.

The Income Tax (Pay As You Earn) Regulations 2003 (http://www.legislation.gov.uk/uksi/2003/2682/regulation/72/made)

malvolio
9th March 2018, 14:08
Tripe. You can keep asserting stuff all you'd like. Almost everything you've written there is false. An IR35 investigation could begin in a variety of ways, but generally through an Employer Compliance Review/Check of Employer Records.

Here's the PAYE 2003 Regulation 72 in original form.

The Income Tax (Pay As You Earn) Regulations 2003 (http://www.legislation.gov.uk/uksi/2003/2682/regulation/72/made)

a) Except we don't know what triggers an IR35 case, corporate returns are merely one route. Also, in these days of iXBRL-coded returns, correlating company and personal income and taxation is simple to achieve.

b) Your quoted section of the Regulation works beautifully in favour of your argument until you allow that the "employer" and the "employee" are one and the same. The problem then is which is liable for the wilful mis-representation of the correct tax position, and who it is that goes to court, the employer or the employee, to defend their position. In every case I've read it's been a person stood there, and their precise relationship between worker and company has never been brought into the discussion. Equally I will allow that the case has been between HMRC and the Intermediary company. Taken together that rather supports the contention (not mine, Dawn Primarola's and others' contention) that IR35 is a personal tax paid by the intermediary company.

Hence my point that we simply do not know who is going to cough up the money but we must not assume that the disappearance of the intermediary company will result in a zero liability on the controlling person who made the decisions. It may, or it may not. I know which at I would bet.

northernladyuk
9th March 2018, 14:34
a) Except we don't know what triggers an IR35 case, corporate returns are merely one route. Also, in these days of iXBRL-coded returns, correlating company and personal income and taxation is simple to achieve.

b) Your quoted section of the Regulation works beautifully in favour of your argument until you allow that the "employer" and the "employee" are one and the same. The problem then is which is liable for the wilful mis-representation of the correct tax position, and who it is that goes to court, the employer or the employee, to defend their position. In every case I've read it's been a person stood there, and their precise relationship between worker and company has never been brought into the discussion. Equally I will allow that the case has been between HMRC and the Intermediary company. Taken together that rather supports the contention (not mine, Dawn Primarola's and others' contention) that IR35 is a personal tax paid by the intermediary company.

Hence my point that we simply do not know who is going to cough up the money but we must not assume that the disappearance of the intermediary company will result in a zero liability on the controlling person who made the decisions. It may, or it may not. I know which at I would bet.

So how does that mean that:


Nevertheless, IR35 is a personal tax issue.

NotAllThere
9th March 2018, 14:34
Continue to be amazed. I'm am merely repeating the statement that has been consistently made by both HMG and various tax advisors and other bodies since 1999.Indeed, which is why I made the statement initially. I was present at one of the first meetings leading to the founding of the PCG.
http://answers-in-reason.com/wp-content/uploads/2016/04/you-werent-there-man.jpg
Whether that was a good thing or a bad thing, I can't say, but I did get a drink out of Andy White. I can only assume that JamesBrown is rather new to this whole contracting lark; he seems to be hiding behind arguments concerning terminology. So much for science. :D

Since 1999, people have been mooting phoenixing their ltd. cos as a way of getting around IR35. Since 1999, tax advisors etc. have been saying that it's not a good idea. Why? 'Cos HMRC can come after you - the worker, the director. If they can come after you and get the tax and NI money off you, I guess you'll find that pretty much a personal tax issue.

I believe you can get a QC opinion that they might come after you, but won't be able to get you. :ohwell

TonyF
9th March 2018, 15:16
There's a good blog post from Whitefield Tax here (https://www.whitefieldtax.co.uk/ir35-and-personal-liability-can-hmrc-proceed-against-a-individual/) about whether the company liability can be passed on to the individual.

Looking at that, if the director has not been negligent then there is not much chance of HMRC being able to transfer the liability from company to individual. The PAYE regulations have limited scope for shifting the liability and if the director genuinely believes that they are outside IR35 then HMRC would (IMHO only) struggle to show that the company willfully failed to deduct the tax and NI due. If the company did not willfully deduct the tax then it cannot be shifted to the individual tax payer.

If HMRC had won tribunals on this point, you'd think that they would be shouting from the rooftops about how they can do this, but I don't rememebr seeing one ever. Is there an example where the liability has successfully been passed from the company to the individual, and what laws did they use to do that?

malvolio
9th March 2018, 15:26
There's a good blog post from Whitefield Tax here (https://www.whitefieldtax.co.uk/ir35-and-personal-liability-can-hmrc-proceed-against-a-individual/) about whether the company liability can be passed on to the individual.

Looking at that, if the director has not been negligent then there is not much chance of HMRC being able to transfer the liability from company to individual. The PAYE regulations have limited scope for shifting the liability and if the director genuinely believes that they are outside IR35 then HMRC would (IMHO only) struggle to show that the company willfully failed to deduct the tax and NI due. If the company did not willfully deduct the tax then it cannot be shifted to the individual tax payer.

If HMRC had won tribunals on this point, you'd think that they would be shouting from the rooftops about how they can do this, but I don't rememebr seeing one ever. Is there an example where the liability has successfully been passed from the company to the individual, and what laws did they use to do that?
Except that is only an issue where the company has been closed down before the case was resolved. As far as I know that has never arisen, and if there were a case in progress you couldn't close the company anyway

TonyF
9th March 2018, 15:41
Except that is only an issue where the company has been closed down before the case was resolved. As far as I know that has never arisen, and if there were a case in progress you couldn't close the company anyway

Why is it only an issue where the company has been closed down before the case was resolved?

Company is trading. Director checks their working arrangements, gets reviews etc, and decides that the contract is outside IR35. As a result they pay out the profits as dividends and does not retain very much in the company (let's say it's £50k retained though, which is a nice reserve fund to have).

HMRC come calling, and win their IR35 tribunal and it's a whopper - they win £450k from the company. But the company doesnt' have the money to pay the tax and NI because they genuinely believed that the role was outside IR35. They didn't willfully avoid paying the tax, they had a difference of opinion from HMRC and the tribunal about whether they were inside or outside, but they werent negligent, they did the assessments, they checked regularly, they tried their hardest to avoid all three IR35 tests. But they still lose. The case is resolved and the company is open.

The company is now insolvent because they owe HMRC £450k and only have £50k left because the dividends were paid from the retained profit legally. The company goes bust.

The PAYE regulations only allow for the liability to shift from company to director if there was negligence or they wilfully avoided paying tax and NI. What evidence can HMRC produce to show that this was negligent? What shows that they willfully avoided the tax? The director made all sorts of checks and on the basis of that made a genuine decision that they were outside IR35.

What law can HMRC use to shift the PAYE liability to the individual from the company? Because it's not in the PAYE regulations, so which law do they use to allow this to happen?

webberg
9th March 2018, 15:52
I think there are two streams of process here and that there may be a degree of conflation.

The West case dealt with a situation in which a director of a company drew loans that he was accustomed to clearing via a salary/dividend process at the end of each year. He accepted that in so doing, the company owed PAYE and he owed tax on the dividend.

However business was not good and he therefore decided to close the company and to do so after declaring a salary but before the PAYE became due and/or was paid.

The question for the FTT was whether the acknowledgement that PAYE was due and the provisioning for the amount in the final accounts, amounted to "payment". On technical grounds the FTT decided (by a casting vote) that this meant the PAYE obligation was met and that it was an employer liability and that the sum had not been, to the knowledge of Mr West (sole director and shareholder), "wilfully" not paid.

So here the question of transfer from company to individual did not need to be considered as the company was liable and had "paid" the PAYE.

In a situation in which an IR35 enquiry leads to the conclusion that there was a deemed employment, then an intermediary, usually the Own Co, is required to pay the PAYE that would have fallen due. That intermediary could be in some instances an agency (Ch 7 ITEPA), or the Own Co (Ch 8 ITEPA). Perhaps in some instances a MSC provider (Ch 9) although you would hope that this would have ben sorted long before.

In most cases the Own Co. Therefore Own Co is liable to a sum deemed to be PAYE. See section 56 ITEPA. This section essentially makes the tax due from the deemed employment a PAYE liability. Although I suspect that there is a technical out if the worker/director could show that they were not aware of the PAYE liability arising until the enquiry, given that the Reg 80 will arrive at the end of the enquiry, to then declare insolvency and walk away would be difficult to avoid the "wilful" tag and liability would move to the individual.

It will interesting to see what the UTT makes of West.

webberg
9th March 2018, 15:57
Why is it only an issue where the company has been closed down before the case was resolved?

Company is trading. Director checks their working arrangements, gets reviews etc, and decides that the contract is outside IR35. As a result they pay out the profits as dividends and does not retain very much in the company (let's say it's £50k retained though, which is a nice reserve fund to have).

HMRC come calling, and win their IR35 tribunal and it's a whopper - they win £450k from the company. But the company doesnt' have the money to pay the tax and NI because they genuinely believed that the role was outside IR35. They didn't willfully avoid paying the tax, they had a difference of opinion from HMRC and the tribunal about whether they were inside or outside, but they werent negligent, they did the assessments, they checked regularly, they tried their hardest to avoid all three IR35 tests. But they still lose. The case is resolved and the company is open.

The company is now insolvent because they owe HMRC £450k and only have £50k left because the dividends were paid from the retained profit legally. The company goes bust.

The PAYE regulations only allow for the liability to shift from company to director if there was negligence or they wilfully avoided paying tax and NI. What evidence can HMRC produce to show that this was negligent? What shows that they willfully avoided the tax? The director made all sorts of checks and on the basis of that made a genuine decision that they were outside IR35.

What law can HMRC use to shift the PAYE liability to the individual from the company? Because it's not in the PAYE regulations, so which law do they use to allow this to happen?

The question is not "was tax wilfully avoided"?

The question is "once a PAYE liability is established, has the director tried to walk away knowing that the PAYE was not and would not be paid"?

So I think the test is applied once the liability is established, i.e. end of an enquiry, and not something that is applied from time to time over the course of the working arrangement.

How that differs from West where a claim from HMRC that he was the heart and mind of the company and "knew" that a PAYE liability carried into insolvency would not be paid, I cannot logically fathom for the moment.

TonyF
9th March 2018, 16:19
HMRC's argument is West seems to be that he knowingly received payments from the company on which it had wilfully failed to deduct tax.

In my example, the director has knowingly received payments from the company on which it had not deducted tax because the expert advice and guidance was that there was no tax to be deducted. It takes HMRC several years and a tribunal to show that the contract was inside IR35, using all their might and skills of persuasion and legal recourse significantly beyond that of the average contractor. If HMRC need years to make that assumption, and a tribunal, and a lawyer (possibly even a QC), I would think that it wouldn't be beyond the skill of the contractor to show that he non-deduction of tax was not wilful.

Does anyone know of any IR35 cases where the liability has shifted from company to individual and on what basis? Links to the tribunal paperwork would help as well.

jamesbrown
9th March 2018, 16:47
So how does that mean that:

Gosh, I think you might be onto something there. :D

jamesbrown
9th March 2018, 16:51
Since 1999, people have been mooting phoenixing their ltd. cos as a way of getting around IR35.

Ships in the night. :laugh

I'm not talking about pheonixing, I'm talking about the circumstances necessary to transfer a PAYE/NICs debt from a company to an individual. Pheonixing is a complete red herring in this context. If the individual knowingly declared an inside IR35 contract as being outside and, hence, failed to operate PAYE correctly, or they did not undertake necessary due diligence to know whether they were operating PAYE correctly on behalf of TheirCo, they're screwed either way - company open or closed.

I'm not sure why this point is so incredibly difficult to understand. Transfer of liability is one thing. Company open or closed is another.

webberg
11th March 2018, 10:51
Agreed on the phoenixing. Couple of ant avoidance rules in 2016 sought to "correct" that position.

The core question on whether it is possible for an employer PAYE (or PAYE equivalent) liability to be transferred to the owner/director of the business, is to be considered separately.

As has been mentioned, where the liability arises outside of the disguised remuneration rules in Part 7A - which have their own transfer rules - the liability can be moved only if the terms in Reg 72 or Reg 81 are met.

These discusses whether the employee KNEW that the employer would not pay the PAYE.

That is a very different test from whether a liability "arose" (and there are demonstrations above on how difficult a question that is) and should not be confused.

If PAYE was not deducted at he time payments were made, but are later found to be due, and a Reg 80 determiantion is issued, then walking away from the employer if it is your company (owner/director) becomes difficult. Not only are HMRC showing activity here to prevent striking off and notifying liquidators of liability to the detriment of other creditors, but they are moving against owner/directors.

That move is based on the sort of argument seen in West, i.e. if you are the heart and mind of the company, then you KNOW that liquidating rather than paying the PAYE is a "wilful" act, and ties in with the general tax policy on close companies which is to see them as extensions of the individual.

It's going to be an interesting few years, especially if the Casandra's are correct and we see thousands of PSCs going to the wall.

jamesbrown
11th March 2018, 12:02
Not only are HMRC showing activity here to prevent striking off and notifying liquidators of liability to the detriment of other creditors, but they are moving against owner/directors.

[snip]

then you KNOW that liquidating rather than paying the PAYE is a "wilful" act

Reading between a lot of lines, you seem to be agreeing that transfer of a PAYE debt is a high bar, but that it becomes simpler once a director is shown to be “walking away” from a debt at the point it has been established. This seems like an odd argument, but I think you need to define “walking away” more clearly. Is your argument that a transfer of liability is less likely if the director does not seek to close the company, regardless of whether they attempt to satisfy the debt? That seems like an odd argument to me. Where’s the case law, or is this simply your opinion on where it could go?

malvolio
11th March 2018, 12:13
Reading between a lot of lines, you seem to be agreeing that transfer of a PAYE debt is a high bar, but that it becomes simpler once a director is shown to be “walking away” from a debt at the point it has been established. This seems like an odd argument, but I think you need to define “walking away” more clearly. Is your argument that a transfer of liability is less likely if the director does not seek to close the company, regardless of whether they attempt to satisfy the debt? That seems like an odd argument to me. Where’s the case law, or is this simply your opinion on where it could go?
No he's saying I believe that a director (perhaps "controlling person" is a better term) who walks away from a legitimate corporate tax debt in any manner remains liable for that debt. The fact that he is also the putative "employee" is irrelevant; the former is being prosecuted, not the latter.

But, just to muddy the waters further, wearing either the director's hat or the worker's hat, both are at fault; the former by debt transfer, the latter for not accepting that paying the correct personal taxation is your liability.

And the net result is a difference without distinction.

jamesbrown
11th March 2018, 12:25
No he's saying I believe that a director (perhaps "controlling person" is a better term) who walks away from a legitimate corporate tax debt in any manner remains liable for that debt. The fact that he is also the putative "employee" is irrelevant; the former is being prosecuted, not the latter.

But, just to muddy the waters further, wearing either the director's hat or the worker's hat, both are at fault; the former by debt transfer, the latter for not accepting that paying the correct personal taxation is your liability.

And the net result is a difference without distinction.

Again, "walks away".

What is the legal definition of "walks away" and "in any manner" that you're employing here?

Putting that aside, are we to infer from your assertions that the corporate veil does not exist, under any circumstances, for a close company (although you don't use this term)? In other words, that the barriers for a transfer of debt by acting improperly (e.g. trading while insolvent) simply do not exist for a close company, because a debt is always transferred to a director when they "walk away" and "in any manner". Or are you making a special argument for HMRC as creditor to an indebted close company?

I await clarification, but your argument seems terribly confused and without any foundation in law, i.e. pure fantasy.

Beyond that, let's ask webberg to speak for themselves.

Jessica@WhiteFieldTax
11th March 2018, 16:10
There's a good blog post from Whitefield Tax here (https://www.whitefieldtax.co.uk/ir35-and-personal-liability-can-hmrc-proceed-against-a-individual/) about whether the company liability can be passed on to the individual.

Looking at that, if the director has not been negligent then there is not much chance of HMRC being able to transfer the liability from company to individual. The PAYE regulations have limited scope for shifting the liability and if the director genuinely believes that they are outside IR35 then HMRC would (IMHO only) struggle to show that the company willfully failed to deduct the tax and NI due. If the company did not willfully deduct the tax then it cannot be shifted to the individual tax payer.

If HMRC had won tribunals on this point, you'd think that they would be shouting from the rooftops about how they can do this, but I don't rememebr seeing one ever. Is there an example where the liability has successfully been passed from the company to the individual, and what laws did they use to do that?


Except that is only an issue where the company has been closed down before the case was resolved. As far as I know that has never arisen, and if there were a case in progress you couldn't close the company anyway

Sorry, late to this.

We had a case of exactly those circumstances in the early years of IR35, say 2001/2 ish.

Client had ceased contracting and was in process of closing company down, when HMRC made an IR35 assessment on company arising out of Employer Compliance Review.

All that was left cash wise in the company was enough for final years CT payment - in this instance there was no CGT distribution happening.

The PAYE/NI Assessment was about double the CT/cash in company, so HMRC went after the the director - I can’t remember, I’d imagine they served winding up order on the company.

We engaged Accountax to argue the case on the transfer, and it was won. The transfer failed, as the director had reasonable grounds to believe contracts were outside IR35. He had both contract reviews and personal due diligence to support this.

jamesbrown
11th March 2018, 16:20
We engaged Accountax to argue the case on the transfer, and it was won. The transfer failed, as the director had reasonable grounds to believe contracts were outside IR35. He had both contract reviews and personal due diligence to support this.

Interesting, thanks. That's exactly what I thought, although I didn't have any IR35 examples to cite. Obviously, each case is different, and the legislation/case law evolves, but I think this clearly demonstrates that an argument can be won, providing the contractor takes reasonable care to operate PAYE correctly (i.e. has a professional contract review). As I said above, if they cannot show due diligence, it doesn't matter whether the company is open or closed, the director would be in trouble (which probably applies to a significant fraction of those exposed to IR35).

WordIsBond
12th March 2018, 08:45
One wonders if there is a substantive difference between cases where the company is already closed vs cases, like the one cited, where the company was not yet closed when the IR35 case began/was decided.

I'd think HMRC would prevent MVL if a case was started. But will they even open an IR35 case when the company has already closed? Can anyone cite a single example where they've done that?

webberg
12th March 2018, 10:00
My point is limited to situations in which close companies have a tax debt and rather than be paid, the director/shareholder allows the company to fall into insolvency or perhaps elects for that option.

Where the tax debt is PAYE or a PAYE equivalent, there are several sets of rules that permit HMRC (at least in their minds and Manuals) to seek to move that liability to the director/owner.

There are those in Chapters 7/8/9 (and now 10) of ITEPA which deal with intermediaries.

There are those in Part 7A (and now in the last two Finance Acts) that deal with the DR charge.

There are those in the PAYE Regulations at 72 and 81.

The West case is an example of how HMRC consider the PAYE rules to work. They lost but on grounds that are finely balanced and the UTT hearing (whenever that is, and HMRC will be happy to see continued uncertainty here) may reverse it.

However I am saying that the decision shows that the hurdle for trasnfer is high and focuses on whether an individual knew that PAYE was avoided. That can happen only when you know there is a PAYE liability.

The comments above around the establishing of a PAYE liability are interesting and I would agree with. We are looking here however at what happens once the liability is known.

Here, the usual HMRC practice we see in EBT cases and the like, is to issue a Reg 80, claim it's not been paid and issue a Reg 81.

In other words reg 80 is on the comapny, Refg 81 on the individual.

reg 72 operates in a similar manner.

So there is a high hurdle, one that HMRC is seeking to lower, and I predict that we will see this as an area of dispute over the comiing years.

jamesbrown
12th March 2018, 15:33
So there is a high hurdle, one that HMRC is seeking to lower, and I predict that we will see this as an area of dispute over the comiing years.

Right, I think we're on the same page, overall, although perhaps not about the significance of the timing (before vs. after a liability is established). I agree that legislation can change, and it will definitely continue to be disputed and new case law established. Also, absent due diligence, I think it would be difficult to show that PAYE had been operated correctly. As nlady mentioned above (IIRC), there will be many that do not conduct this due diligence.

madame SasGuru
12th March 2018, 17:13
As nlady mentioned above (IIRC), there will be many that do not conduct this due diligence.

Wrong sockie of wrong former poster but yep there will be a lot of people with no evidence of appropriate due diligence. Equally I suspect most won't know how to handle a tax enquiry and may just pay a demand.

jamesbrown
12th March 2018, 17:22
Wrong sockie of wrong former poster but yep there will be a lot of people with no evidence of appropriate due diligence. Equally I suspect most won't know how to handle a tax enquiry and may just pay a demand.

Oops, sorry. :D

Maslins
13th March 2018, 12:10
One wonders if there is a substantive difference between cases where the company is already closed vs cases, like the one cited, where the company was not yet closed when the IR35 case began/was decided.

I'd think HMRC would prevent MVL if a case was started. But will they even open an IR35 case when the company has already closed? Can anyone cite a single example where they've done that?

My anecdotal experience of this from MVL Online:
- we do ask if there are any active enquiries as part of the clearance request...and if there was, well, firstly I'd hope we'd never get involved in the first place if there was...but certainly we wouldn't be able to conclude the liquidation without HMRC's ok they were happy it had been settled to their satisfaction.
- in not too far off 1,000 cases since we started, not once has an HMRC inspection been started after our appointment. Of course that's no guarantee it can't happen...but some people seem to be of the view that putting a company into liquidation would often trigger an investigation on the basis if HMRC don't challenge it then, they never can. We haven't seen any evidence of that.

Theoretically a liquidation that has been completed could be brought back to life by HMRC, but it would be very expensive for them to do so, plus they'd have had to give the ok before the liquidation was complete. Therefore unless some massive new information came to light, I can't realistically see them doing this.

WordIsBond
13th March 2018, 17:15
Thanks, Chris. That confirms what I thought all along, so it must be true and completely representative of all aspects of reality. :D