Taxman's IR35 officials 'monitoring dividend levels'

Monitoring the dividend levels of personal service companies has emerged as the taxman’s latest technique to identify contractors ripe for investigation under IR35.

The technique was revealed yesterday by Jason Piper, of the Association of Chartered Certified Accountants, in his oral evidence to the Lords’ Personal Service Companies Committee.

He said he was “independently aware” that HM Revenue & Customs is monitoring PSCs’ dividend levels and dividing them by the number of shareholders, as an IR35 risk assessment.

Mr Piper’s revelation was in response to a Lord querying a question on the 2013 tax return, which asks contractors to state how much in dividends and salary they withdrew from their PSC in the tax year.

Also giving evidence to the committee, Patrick Stevens, a director at the Chartered Institute of Taxation, seemed to agree with his industry colleague that HMRC would scrutinise PSCs’ answers to the question.

“Logically, they [HMRC] are going to use it as a springboard to police,” said Mr Stevens who, like Mr Piper, conceded that HMRC would be better-placed to say how it uses taxpayers' responses.

Almost regardless, the question – ‘If you provided your services through a service company, enter the total of the dividends and salary you withdrew’, will be “compulsory” for all PSCs.

“It’s specified now by legislation that you do now need to answer the question,” added Mr Piper. “They’ve changed the law recently because of this uncertainty [over whether the question must be answered] so in the future, it will be compulsory.”

IR35 expert Kate Cottrell, who also gave evidence yesterday to the committee, has pointed out that year-end tax records showing total dividends paid do allow HMRC to “quickly identify” whether there is an IR35 risk to the taxpayer.

Speaking at the time to CUK, she said: “It is the total amount of dividends paid over the year that would put the contractor onto HMRC's radar and more likely to be selected for [IR35] investigation i.e. the more tax/NIC potentially at stake, the more likely an investigation.”

And another former Revenue inspector, Bob, has cautioned against the total amount of dividends being high, assuming the contractor wants to lose one of the characteristics that he believes HMRC looks for when risk-assessing PSCs for IR35.

He listed those characteristics: “Operating through a limited company [with] relatively low turnover; as the sole director, who has minimal expenses and pays [themselves] the minimum wage but has large dividends.”

Editor's Note: Further Reading -

A contractor's dividends can indeed spark an IR35 enquiry

Avoid the taxman netting your contractor dividend

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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