Taking salary as capital gains only

[scarletjim]

Apologies if this is obvious to some, but I'm looking into going down the contractor route for the first time, and can't find an answer to this question...

IR35 seems to try to make contractors pay PAYE and NICs even if they are employed through 'service companies'. But what is to stop them taking little or no salary, then dissolving the company at the end of each financial year, then taking the entire profit as capital gains, thereby gaining a much greater tax free allowance (personal allowance plus CGT allowance)?

The only downside I can see is that I would need to dip into my savings until the year ends, as I would have no income.

Have I misunderstood IR35? The above plan would accept that I do fall under IR35 (I do a lot of project management and accounting work) but as I have little or no salary, it would hardly affect me. Is this correct?

Edit:

http://www.hmrc.gov.uk/ir35/faq_qand...tation_q10.htm

From the Inland Revenue website, this suggests that I would still have to pay NICs on my capital gain, but would surely still save a huge amount on Income Tax?

[Rebecca Loos]

Isn't CGT at the same level as Income Tax?

[malvolio]

It is, in practice. Also, this would be seen as a clear tax evasion practice, so you would be prosecuted, rather than just penalised.

Have you read the IR35 guides on CUK and the PCG yet? If not, I suggest you do, strangely enough the HMRC wesbite is not the best source of knowledge in this area.

[scarletjim]

Isn't CGT at the same level as Income Tax?

But you only have to pay CGT on Capital Gains above about £8.5k I believe, plus your personal allowance if you have no other income for the year, so nearly £13.5k rather than £4.5k.

Why would my plan be tax evasion rather than tax avoidance, surely I am just trying to manipulate the rules (while still complying with them) to maximise my income just like everyone else? (Despite being an accountant, tax issues are not my aarea of expertese!)

If the HMRC website is not a good source of info, please can you suggest somewhere reliable and clear?

Thanks.

[malvolio]

Jeez, more amateurs - go and read my reply again.

It will be seen as evasion (not avoidance, evasion) since you are using a completely artificial commercial construct - no real business would do what you propose. You would get an investigation as soon as your second SA form was submitted.

If the HMRC website is not a good source of info, please can you suggest somewhere reliable and clear?

I just did. You're already at one of them. The other is not too hard to find.

[scarletjim]

I'm sure we were all amateurs at some point!! Ok I found PCG now, I thought you were referring to some other piece of legislation that I hadn't heard of. Cheers for your help, I'll go away and do some reading/investigating (and not get prosecuted!)

[planetit]

Your plan might be fine, but you would still have to calculate a deemed salary and pay PAYE/NIC on it. As far as I know, this weird distribution from the company (capital gain?) doesn’t enter into the equation of deemed salary. The only difference would be that you wouldn’t have any money left in the company to pay the PAYE/NIC.

P.S. Is the confusion perhaps that you think IR35 deemed salary is in some way connected to the actual salary you pay? It isn’t.

[ASB]

Tou Can

Sort of.

Assume you are clear of the IR35 issues then at wind up you can distribute your companys assets to it's shareholders as a capital distribution. But, you need an extra statutory concession (16 I think) from the revenue in order to do this. If you have been trading a year and have alot retained they may be somewhat reluctant to do this.

Repeating the process will make you more unpopular. However there is absolutely nothing to prevent from incorportating and winding up on an annual basis. Just make sure to do absolutely everything exactly correctly because if you don't you'll be in trouble. The tax man also has some powers to effectively ignore this sort of pheonix arrangment under certain ciscumstance.

Now if you are not clear of IR35 and do distribute capital reserves as capital then that - of itself - is fine (provided you got the concession).

However you are not clear of the IR35 liability because that is yours personally.

[boredsenseless]

Strange really isn't it - IR35 is there to extract tax from 'limited companies' that in the Governments view aren't 'real' companies.

So in order to circumnavigate this legislation you decide to operate in a way no real company would - therefore admitting that you are obviously trapped by IR35 and inviting an audit.

AS previously said by ASB - IR35 is a personal tax it really has little to do with your company

[Bradley]

Re:Avoidance

Jeez, more amateurs - go and read my reply again.

It will be seen as evasion (not avoidance, evasion) since you are using a completely artificial commercial construct

It's not evasion it's avoidance
http://www.hmrc.gov.uk/manuals/ct123manual/CT3685.htm