IR35 liability?

Semantic

My company is changing hands (mbo) in April and on changeover I am considering reducing my work days to 3/4 and spending 1/2 days a week on a new company doing something different (high tech software development)

My current job entails writing things on my area of expertise and talking to people about my thoughts. Nobody oversees my work or tells me what specifically to write, I can do it from anywhere at any time (I travel a lot researching). I typically write a monthly report and little reports around whatever else I find interesting. As I am an expert in my field I could only really substitute my services with those of another expert. Other companies have asked for my reports in Asia etc, but will pay a fraction of the amount my current company will, who want exclusivity in Europe.

I plan on funding my new business through the SEIS via family contributions and it should be eligible for R&D tax credits as it will take a full year or so of full-on innovative development to address the problem I have identified (I will also be applying for a Smart grant at the proof of concept stage). I will likely employ 3-4 people doing this.

Can anyone see any issue with my old company paying my new company for my services as opposed to staying a PAYE employee? This seems a superior method as after paying 12.5% flat rate VAT on the services contract I shouldn't have any corporation tax to pay due to R&D tax credits and can extract up to £8k in salary and £37k in dividends to pay the bills.

If there is an issue an this does fall under IR35, would my old company or new company be liable for any penalties?

Thanks,

Semantic

InsideInsurance

My understanding of IR35 is that it is your new company/ you that have the liabilities should you be found to be inside IR35 and not the company employing the services of you.

As to if you are inside or outside of IR35, you can do a basic test using something like http://www.contractorcalculator.co.uk/IR35_Test.aspx

If you are concerned I have seen a couple of companies offering insurance against IR35 (both investigation costs and liabilities) which may be a consideration. They require you to confirm your working practices and provide the contract to review before they will provide cover.

agrinnall

Could you clarify things just to make sure we're all looking at it the same way. Are there actually three companies involved: company A, where you work full time now; company B that is buying company A and where you want to reduce your hours to 3/4 days a week; and company C which is your own limited company where you will be working 1/2 days a week on activities unrelated to your work for company A/B? And rather than work directly for company B, you want to contract your services to company B via company C?

Edit: just spotted the MBO bit, so Companies A and B are actually the same, but different owners, is that right?

Semantic

Yes, company B is the management buyout of the EU subsidiary of company A.

The Asian subsidiary of A has also offered to pay me for my reports.

pacontracting

This is exactly what IR35 was originally set up to prevent (but has since has it's remit expanded by HMRC based on their interpretation of the law).

You work for Company A as an employee. You want to start Company B (your own company) to do something 1/2 days a week. You want to leave Company A as an employee but then work freelance for Company A using Company B as your charging vehicle - the typical Friday - to - Monday scenario.

The most likely is that HMRC would see your contract between your company and Company A as inside IR35 and you may find yourself inside for that contract only.

Alternatively - your current role within Company A suggests you nearly work as a freelancer anyway so if you created a new contract with Company A such that the terms were different to your current Contract of Employement - you may find yourself outside IR35.

Typically though - if you really want to avoid IR35 in this situation - it's best to either stay as you are with Company A (as an employee) part time and start Company B or leave Company A and have nothing further to do with them.

Unfortunately - IR35 has no specific rules - only interpretations of the law and typically - to fight HMRC in an IR35 case - you would need a lot of money. That's why a lot of people find IR35 so unfair.

chrismac1

The effectiveness of IR35 is near zero, hence Cameron and Clegg talk of "general anti-avoidance procedures" along the lines of Canada as a replacement for IR35. My suggested plan is:

1. You draft a suitable "IR35-proof" contract with your old company. You make sure both parties are happy with the clauses this will require, and you'll operate in line with them - otherwise it's a piece of paper with as much legal standing as a piece of Andrex.

2. You set up your limited company.

3. You get tax investigation insurance. Should you be in the HMRC firing line, you can now throw as many bucks into the hat as they can.