I would like this discussion to be opened up for wider debate as I believe that many of you are overpaying tax/NIC by approx £1,000 pa (net of additional taxes payable).
My belief is that, as a director, you do not have to pay NMW unless you have a service contract. I acknowledge that a service contract may be implied (as well as verbal or written) but this is sufficiently ambiguous that if it were my money, I would be saving the £1,000 pa.
Other arguments I have heard are that you are more likely to be investigated if you pay yourself £97 pw, that you should pay yourself at least sufficient to pay your monthly living expenses and that £97 pw "takes the piss". I will address each of these separately.
It is certainly not my experience that you are more likely to be investigated and I've never seen any stats to back it up.
I actually think that you are more likely to be investigated under NMW on the basis that HMRC are receiving cheques and payslips and P35's with figures on them so there is potentially something to investigate whereas with a salary of £97 pw the deductions are usully nil. I believe that an employer compliance officer is less likely to investigate a P35 showing nil deductions as there is less likelihood of it being wrong. This is just gut instinct though - I have no stats to back it up.
Even if it were correct, let's be a bit more scientific about this and do some numbers:-
What are the chances of an IR35 investigation if you pay £97 pw. Let's be really conservative and say 2%. What are the chances of an IR35 investigation if you pay yourself NMW? Let's go the other way and say 0%. So the increase in chances are very conservatively 2%.
Let's then argue that the chances of a successful IR35 challenge is 20% (again, very, very conservative).
The average successful IR35 challenge costs £12K.
Therefore, being as conservative as reasonably sensible, the expected cost of paying yourself £97pw vs NMW is 2% x 20% x £12K = £48.
I think more realistically the figures are probably as follows:-
Chance of an investigation if salary = £97 pw - 0.5%
Chances of an investigation if salary = NMW - 1%
Chances of a successful IR35 challenge - 5%
(And the £12K figure remains the same)
You can play with the numbers any way you like. You won't get anywhere near £1,000.
And if you're really cautious, you could just insure against the IR35 liability (I am aware that some policies require you to be pay yourself NMW but there are others that don't).
The second argument is that you should pay yourself sufficient to cover your monthly living expenses. I think it is just a myth that this could ever be argued. Certainly, I have never come across any legislation or case law to suggest that this could be an issue. Some people genuinely earn less than they spend. It is none of HMRC's business.
The third point is that it is "taking the piss". Again, this is simply not a factor. In fact there was a court case where the judge ruled that it was perfectly reasonable for a taxpayer to organise his affairs in such a way as to minimise his tax liabilities.
Anyone agree/disagree with me? If you disagree, what is your reasoning?
My belief is that, as a director, you do not have to pay NMW unless you have a service contract. I acknowledge that a service contract may be implied (as well as verbal or written) but this is sufficiently ambiguous that if it were my money, I would be saving the £1,000 pa.
Other arguments I have heard are that you are more likely to be investigated if you pay yourself £97 pw, that you should pay yourself at least sufficient to pay your monthly living expenses and that £97 pw "takes the piss". I will address each of these separately.
It is certainly not my experience that you are more likely to be investigated and I've never seen any stats to back it up.
I actually think that you are more likely to be investigated under NMW on the basis that HMRC are receiving cheques and payslips and P35's with figures on them so there is potentially something to investigate whereas with a salary of £97 pw the deductions are usully nil. I believe that an employer compliance officer is less likely to investigate a P35 showing nil deductions as there is less likelihood of it being wrong. This is just gut instinct though - I have no stats to back it up.
Even if it were correct, let's be a bit more scientific about this and do some numbers:-
What are the chances of an IR35 investigation if you pay £97 pw. Let's be really conservative and say 2%. What are the chances of an IR35 investigation if you pay yourself NMW? Let's go the other way and say 0%. So the increase in chances are very conservatively 2%.
Let's then argue that the chances of a successful IR35 challenge is 20% (again, very, very conservative).
The average successful IR35 challenge costs £12K.
Therefore, being as conservative as reasonably sensible, the expected cost of paying yourself £97pw vs NMW is 2% x 20% x £12K = £48.
I think more realistically the figures are probably as follows:-
Chance of an investigation if salary = £97 pw - 0.5%
Chances of an investigation if salary = NMW - 1%
Chances of a successful IR35 challenge - 5%
(And the £12K figure remains the same)
You can play with the numbers any way you like. You won't get anywhere near £1,000.
And if you're really cautious, you could just insure against the IR35 liability (I am aware that some policies require you to be pay yourself NMW but there are others that don't).
The second argument is that you should pay yourself sufficient to cover your monthly living expenses. I think it is just a myth that this could ever be argued. Certainly, I have never come across any legislation or case law to suggest that this could be an issue. Some people genuinely earn less than they spend. It is none of HMRC's business.
The third point is that it is "taking the piss". Again, this is simply not a factor. In fact there was a court case where the judge ruled that it was perfectly reasonable for a taxpayer to organise his affairs in such a way as to minimise his tax liabilities.
Anyone agree/disagree with me? If you disagree, what is your reasoning?
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