IR35, what is the max that can happen?

[Alpha]

I'm a software consultant, who has been a permie for the last three years, and just got a normal do 6-months work and get paid a daily rate for it, city contract. The employer just needs an extra hand to help the permies (and the other contractors). The ClientCo hires contractors for long time and treat them like permies.

While the contract between the agent and my limited company can be adjusted not to fall into IR35, however, the work practices might fall into that.

I have my unemployed partner working with me in the limited company and having 50% shares, so being out of IR35 compared to in IR35 makes a huge difference in take-home income that worth the risk of acting as out of IR35.

While I will be following best practices to be out of IR35, my question is, after reading the Dragonfly case, what is the max that could happen if I get caught under IR35? My initial answers are:
- Less than £10K fees to different parties associated with the investigation - Please correct me if I am wrong.
- Pay back the difference after a court judgement - I will keep the difference in a saving acount, in case
- Hassle - But the difference worths it
- No criminal record - Please correct me if I am wrong.

What else?

[SueEllen]

-Interest on the amount owned
-A fine
-A lot of stress due to unwelcome attention from HMRC threatening to take your belongings.

I would get the contract changed to be out of IR35 if your working practises are out.

If you have had the contract reviewed then the company who reviewed the contract would be happy to help you alter it.

[BlasterBates]

Have you considered insurance? That should at least cover all the legal costs associated with battling your case, and should take a lot of stress out of it. I think a lot of stress is caused by employing a tax consultant or lawyer and fretting about throwing money down the drain fighting your case.

[Clare@InTouch]

If you end up in Court/Tribunal and it's found that you're inside of IR35 then HMRC can collect the tax & NI due plus:

• 30% penalty if they consider you were careless
  
• 70% penalty if they think you knew you were inside IR35 but deliberately didn't declare it
  
• 100% penalty if it was deliberate and you tried to hide it

HM Revenue & Customs: New penalties

Plus of course the fact that these cases can rumble on for a considerable length of time!

[centurian]

I have my unemployed partner working with me in the limited company and having 50% shares, so being out of IR35 compared to in IR35 makes a huge difference in take-home income that worth the risk of acting as out of IR35.

Are you splitting the income, in which case you have more to worry about than IR35. You should check out s660. It hasn't bitten as hard as it could have done, but don't ignore it.

To answer some of your questions - you will pay the difference plus interest (higher than base rate), plus a "penalty" of up to 100%, plus your own costs. This can be backdated up to 6 years, so you could potentially end up paying 3 times the original amount.

It's a civil matter, so there is no criminal record (unless you have deliberately hidden stuff from them - then it becomes tax evasion). It also means the burden of proof is not "proof beyond reasonable doubt", but "balance of probabilities". Don't let that worry you too much, but don't get complacent believing that HMRC need to "prove" their case - they don't - at least not to a criminal standard.

I'm surprised no-one has ever challenged HMRC's ability to levy fines under the civil burden of proof. They are basically applying very severe financial penalties lower than what most criminals pay as fines.

Anyway, I digress. Insurance may be useful if it helps you sleep at night. There are various levels of insurance. Some will offer basic insurance that just covers arguing your case. Others will offer cover for the penalties after a review of your circumstances. Don't be tempted to exaggerate your circumstances, or the insurance will be worthless anyway - just save yourself the cash. If they're not prepared to offer you insurance on your working practices, take that as a hint.

[BlasterBates]

I would get your contract reviewed. If it is reviewed then HMRC can't argue negligence, plus you can probably get insured for the penalties. If it doesn't pass a review then your risk is high.

[krytonsheep]

what could happen if I get caught under IR35

The question should never be 'what's the worst that can happen if I avoid paying tax', it should be 'am I happy with my rate after tax'. If it's inside IR35 and you're not happy with the take home pay, ask for more money or find another contract.

The clients I've worked for are fairly understanding when it comes to IR35, e.g. if they want me to invoice by the hour/ do timesheets and make holiday requests, they'll pay 25% more than if they just give me a purchase order and let me organise my own time.

[Dark Black]

The clients I've worked for are fairly understanding when it comes to IR35, e.g. if they want me to invoice by the hour/ do timesheets and make holiday requests, they'll pay 25% more than if they just give me a purchase order and let me organise my own time.

I wasn't aware that simply being on an hour rate and submitting timesheets automatically put one inside IR35...

Still, if you can get an extra 25% on that basis... well done you!

[Wanderer]

The question should never be 'what's the worst that can happen if I avoid paying tax', it should be 'am I happy with my rate after tax'. If it's inside IR35 and you're not happy with the take home pay, ask for more money or find another contract.

I think the OP's point is that he believes he is outside IR35 but as it's never a 100% certainty, he wants to know how much it would be prudent to set aside in a war chest to cover his liabilities (taxes and penalties) should later be found to be inside IR35.

It's a tough one, but I would speculate that if you have taken reasonable care, had your contract professionally reviewed and you have insurance to get yourself good representation in the event of an investigation, that you would be looking at paying up the taxes you avoided plus a penalty of 0% to 30% plus interest at the official HMRC rate in the unlikely event that you were found to be outside.

Does anyone have a real world example of someone who got caught and how much they had to pay up? Or are they deliberately kept quiet to keep us guessing (and on the straight and narrow).

[escapeUK]

If you end up in Court/Tribunal and it's found that you're inside of IR35 then HMRC can collect the tax & NI due plus:

• 30% penalty if they consider you were careless
  
• 70% penalty if they think you knew you were inside IR35 but deliberately didn't declare it
  
• 100% penalty if it was deliberate and you tried to hide it

HM Revenue & Customs: New penalties

Plus of course the fact that these cases can rumble on for a considerable length of time!

How is the 70% and 100% options different?

If they claimed I owed £40k and said I should pay £80k that would be more than enough to get me to leave the country and never return. I hate this place at the best of times (hence my username)