IR35 Liability

Nouska

I used to be the managing director of a limited company set up purely as a vehicle to allow me to work as an IT contractor. In one year I took out more money from the company than I declared as salary and at my accountants advice this sum was declared as a director's loan.
In the following year IR35 regulation was introduced and during that year my contract was sent to the Revenue for their opinion as to the contract's status under IR35. I had no response for a very extended period and the filing of annual accounts was required and, in lieu of any guidance from the Revenue, they were filed in the same manner as the previous year with a further sum added to the director's loan.
Immediately after this my contract ended and I was unable to find further work plus the revenue finally replied saying that the contract did fall under IR35 regulations. My accountant told me that in the light of the Revenue's comments the annual accounts would have to be 'substantially amended' but before this could happen the company was forced into liquidation.
The liquidators have taken the stand that I am liable for the full amount in the directors loan account. I maintain that if IR35 regulations were in effect the sum added to the director's account counts as salary under PAYE leaving the company liable to the revenue for the income tax due on this sum and me liable to repay the sum added to the loan account during the year prior to IR35 being introduced.
The liquidators have dismissed my argument even though the list of company creditors includes the Revenue, including an amount calculated under IR35. They have obtained a court order over my home and require me to make significant repayments on a weekly basis against the amount claimed. This leaves me financially unable to fund an attempt to fight this matter in court.
Any advice in this matter would greatly appreciated

Pennywise

I'm afraid you havn't a leg to stand on. You simply took out too much money and didn't leave enough for the tax man. Whether IR35 applied or not is irrelevant - either way the taxman didn't get his proper share.

If IR35 applied, your PAYE/NIC would be higher but corporation tax would be lower.

If IR35 didn't apply, your PAYE/NIC would have been lower but corporation tax would have been higher and the company would have had to pay an extra 25% on the overdrawn directors loan account.

HMRC will always look towards claiming unpaid tax from the director/shareholder of a "one man" company if they believe that the director/shareholder took out more money than was available. From the sounds of it, you spent the tax money on yourself (by taking a directors loan), so HMRC will pursue you for it.

In any event, you took a directors loan, so have to repay it. Technically, a directors loan is illegal, so you could also have been prosecuted, although that is fairly unlikely.

olly300

Pennywise wrote: »

In any event, you took a directors loan, so have to repay it. Technically, a directors loan is illegal, so you could also have been prosecuted, although that is fairly unlikely.

Why is a director's loan illegal?

If a company needs funds i.e. buy equipment and there is not enough in the company account why is it illegal for a Director to loan the company money to buy the equipment until the company can pay it back?


OP why would you send your contract to the Revenue? Of course they are going to say you fall under the law which means they can get more tax out of you.

If you need a contract reviewed there are lots of lawyers who do it for a small fee within 2 weeks. Plus there are insurance products out there which would have paid for fighting the Revenue if you didn't do the stupid first mistake. If your accountant recommended you did this then the accountant wasn't acting in your best interests.

I suggest since you made the fatal mistake of allowing the Revenue to get more tax out of you, you just pay up and don't waste your own money fighting it in court.

amf

olly300 wrote: »

Why is a director's loan illegal?

If a company needs funds i.e. buy equipment and there is not enough in the company account why is it illegal for a Director to loan the company money to buy the equipment until the company can pay it back?

It is strictly illegal for the director to borrow off his company. As Pennywise said, it is unlikely that any action would ever be taken on this aspect.

Pennywise

olly300 wrote: »

OP why would you send your contract to the Revenue? Of course they are going to say you fall under the law which means they can get more tax out of you.

When IR35 first came in, it was standard practice for accountants to send contracts for review. We did plenty and only 1 out of several dozen we sent was found to be caught by IR35. At that time, there weren't the multitude of IR35 specialists that there are now. The alternative for our clients when IR35 first came in was counsel's opinion for which we were being quoted a minimum of £1k for a contract review. Time marches on, things change, lots of IR35 specialists have entered the market. There was also anecdotal evidence that some HMRC offices were taking a far tougher approach and starting to find contracts "caught" more often than not, so approx 2-3 years after IR35 first came in, the general practice was for accountants not to send contracts to HMRC and hence the prevalence of IR35 specialists instead. Now, I quite agree it would be extremely foolish to send a contract for IR35 review, but going back to when it first came in, it was the recommended approach.

red789

There will be an Early Morning motion, signed by 78 MPs, which proposes the abolition of IR35.

http://www.itcontractor.com/Articles_IR35_News_Advice/view_article.asp?id_no=5094&photopage=0

If you want to, try the No 10 petitions - if +500 signatures are included it gets an official response. there are 2 it turns out - one is mine, but sign either! I dont mind!

http://petitions.number10.gov.uk/DropIR35/

and

http://petitions.number10.gov.uk/STOP-IR35/