What is the best mix of salary, expenses & dividends?

[CrazyMoose]

Why is it at year end I start to ask myself these questions? Perhaps my recent P35 submission has got me thinking a bit more about HMRC compliance. I’m referring of course to the most important question for contractors on the P35 - "Are you a service company?" My answer was of course "Yes" (based on their new definition) - next question "If yes, have you correctly applied IR35 or the MSC legislation?”. Now this was a bit trickier. I know I’m not working via MSC because I look after my own affairs (I act as Director, control the bank account etc), but whether or not I have “correctly applied” IR35 is certainly one for debate.

Anyway, back to the original question. When considering your position for IR35, exactly what is the appropriate or best / most compliant mix of remuneration?

[dodgy_Dave]

Originally Posted by CrazyMoose

Why is it at year end I start to ask myself these questions? Perhaps my recent P35 submission has got me thinking a bit more about HMRC compliance. I’m referring of course to the most important question for contractors on the P35 - "Are you a service company?" My answer was of course "Yes" (based on their new definition) - next question "If yes, have you correctly applied IR35 or the MSC legislation?”. Now this was a bit trickier. I know I’m not working via MSC because I look after my own affairs (I act as Director, control the bank account etc), but whether or not I have “correctly applied” IR35 is certainly one for debate.

Anyway, back to the original question. When considering your position for IR35, exactly what is the appropriate or best / most compliant mix of remuneration?

I'm no expert CM, but I think you must pay yourself at least £10,000 in salary to avoid any unnecessary attention from HMRC.

[The SMG]

Originally Posted by dodgy_Dave

I'm no expert CM, but I think you must pay yourself at least £10,000 in salary to avoid any unnecessary attention from HMRC.

Not necessarily. You really want to be taking a prudent view when it comes to drawing money OUT of your limited company. Some contractors will royally take the p1ss, pay themselves a tiny salary just over NMW, claim more expenses than they actually incur and then distribute the remainder in dividends (no National Insurance remember).

I tend to pay myself around £15 - £20K per year as salary. Although this is not even close to the normal market rate, it does suggest to Hector that I’ve taken some time to think about it and not crudely calculated PAYE based on NMW or something similar. Expenses wise, only claim for what you can reasonably justify. All expenses need to have been incurred 'wholly, exclusively and necessarily in the performance of your duties.

Once you calculated salary and expenses, the rest falls out as divs, after the deduction of Corporation Tax at 21%. In terms of IR35, the golden rule is if in doubt, use the deemed payment calculation.

G

[curleyted]

That's a very lucid answer for such an early time in the morning....

[The SMG]

Originally Posted by curleyted

That's a very lucid answer for such an early time in the morning....

Thanks very much!

Enough of these pleasantries curley, what's are thoughts?

G

[curleyted]

Originally Posted by The SMG

Thanks very much!

Enough of these pleasantries curley, what's are thoughts?

G

My thoughts are that from October you'll be paying more NI:

http://www.freelancesupermarket.com/...imum-wage.aspx

[Beefy198]

Shouldn't be much more though, should it?

Good time for the government to help businesses by increasing their cost base....

[Bel]

Originally Posted by CrazyMoose

Why is it at year end I start to ask myself these questions? Perhaps my recent P35 submission has got me thinking a bit more about HMRC compliance. I’m referring of course to the most important question for contractors on the P35 - "Are you a service company?" My answer was of course "Yes" (based on their new definition) - next question "If yes, have you correctly applied IR35 or the MSC legislation?”. Now this was a bit trickier. I know I’m not working via MSC because I look after my own affairs (I act as Director, control the bank account etc), but whether or not I have “correctly applied” IR35 is certainly one for debate.

Anyway, back to the original question. When considering your position for IR35, exactly what is the appropriate or best / most compliant mix of remuneration?

You need to ascertain the work status for each engagement you carried out in each business year. Your contract terms (upper and lower contracts) as well as your working practices should indicate which engagements the IR35 rules applied.

If the IR35 rules did apply for one or more engagement(s), you are obliged to pay Class 1 NICs and income tax on all revenues from that/those engagements (just like staffed employees)

If the IR35 rules don't apply for one or more engagement(s), you are entitled to pay yourself minimum wage and take the rest as dividends, subject to Corporation Tax.

I suggest that there are three ways to minimise an HMRC investigation and to avert a protracted investigation in future.

In reverse order of importance:

(3) Fill in your HMRC returns honestly and correctly
(2) Know the kind of work that you do and get your contract terms expertly reviewed prior to accepting an engagement.

**NO.1 **

Always use the correct payment route or payment vehicle for the engagements you take up.

Not very sexy, I admit, but vital....

This prevents you from getting complacent, by taking short cuts that may result in carelessness about your working practices matching the contract terms and/or filling in your tax returns properly.

It's not just hirers and recruiters that can generate borderline engagements. This is easily overcome, with negotiations and expert contract reviews.

Contractors also risk converting what could have been a perfectly good IR35 compliant engagement into a 'borderline one' just by using an inappropriate trading vehicle (a limited co) without a good reason. For careless contractors (not that I'm suggesting that you're one ) a Real Arrangements Letter could make matters a worse, not better.

Disasterous - when you consider that IR35 investigations can be applied to engagements that go back several years.

If you're in the slightest doubt that your engagement will be IR35 compliant, you are much better off using a brollie for that engagement.