Contractors’ Questions: Is paying only dividends as a director an IR35 bypass?

Contractor’s Question: I might be misunderstanding how IR35 works, and is going to work in the private sector from April 2020, but couldn’t I just be paid as a director of my company – so with no salary as I currently take as my company’s employee -- to put IR35 out of bounds?

So, if I only received monies from my client as a director of my company, not as an employee as such, and got rid of any agency in the chain, wouldn’t that kick the intermediaries legislation into touch and stop it from being even potentially in play?  

Expert’s Answer: The short answer is no. What you propose isn’t likely to put you out of scope with regard to IR35. Even if you take no salary, taking dividends as a director of your business will make little difference, because the dividend income you take could still be reclassified as employment income.

So not paying yourself a salary, just dividends, is not effective in avoiding IR35. Should a PSC be ‘caught’ by IR35, all income received by the company during the period of investigation is reclassified as employment income.

How that income was paid out to it employees/directors is irrelevant; in order to be caught by IR35, it is the possible employment relationship with your client that is investigated, not your employment with your own company. And any IR35 investigation which leads to a HMRC victory, and all those that have led to a HMRC victory, would end – and have ended -- in the contractor’s income being reclassified; dividends and salary.

The expert was Kate Hardy, employment status manager at IR35 specialists Qdos Contractor.