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IR 35 & VAT

If we are caught by IR 35, and all income (bar a pittance) is deemed to be salary, can we stop collecting VAT?

VAT is not currently collected or payable on salary, and it is unlikely that the 5% part of income not deemed to be salary will bring us near the VAT threshold.

What do you think ?

Leo Heffernan


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By admin
16th Mar 2000 17:19

Having Your Cake And Eating It
I find it utterly amazing that one the one hand you are a valid business in the eyes of the law, and on the other you aren't.

If there weren't money involved this would be a clear cut issue. You would be a business. No if's, no but's, just straightforward legal business.

Governments do like to find interesting ways to take more money off the individual. The present shambles of a government would be accepted into the magic circle for their sleight of hand, delivering tax cuts on one side whilst taking a pickaxes on the other.

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By admin
16th Mar 2000 11:42

The VATman speaks - part one
Here's the written response I got from Customs & Excise. I asked the following:

Since my company's income is now classed as my personal income "for tax and
NIC purposes", should I be collecting VAT against it?

Since only 5% of my company's income is not classed as my personal income,
should I only be paying VAT on 5% of said income?

Since only 5% of my company's income is allowed to be used for expenses
incurred in running my business, can I still reclaim VAT on the items that
will inevitably have to be met from outwith this amount?

he said:

I refer to your e-mail o 21 JAnuary. First may I apologise for the delay in reply.

As you are aware taxation of personal income and corporation tax is the province of the Inland revenue whilst VAT is administared by
Customs & Excise. Legislation in respect of each tax regime is separate and discrete.

The present problems arise as this boundary has become blurred.

Firstly, any problems in respect of the implementation of IR35 legislation must be referred to the Inland Revenue. Their helpline is
0141 285 4000 and I hope they can assist you in any particular difficulties in that area.

I now turn to VAT. In thi scase the VAT liability of any supply is determined by reference to the relevant UK legislation. That
legislation is in itself founded upon the EC Sixth Directive which sets out a common system of VAlue Added TAx.

I can confirm that the supply of computer consultancy by (company ltd.) to a UK customer is standard rated for VAT. That would
also be so regardless of any other taxation provisions relating to the company, it's directors or employees.


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By admin
16th Mar 2000 11:47

The VATman speaks - part two

The VAT position is determined by the evidence of facts regarding the actual supply made.

Do remember that Value Added Tax is a tax which you apply over and above the consideration for (company ltd.'s) supply and that
you collect and remit that tax to us.

It follows that VAT is not a tax on the personal income of directors or employees and I think the present confusion arises from a
failure to recognise that the limited company is a legal entity separate and distinct from yourself as a legal person.

From the above it will be clear that, on the basis of the information provided the whole of your companies income is liable to VAT and
hence all input tax relating to your business can be reclaimed subject always to the normal rules.

I do hope this clarifies the position.

Yours sincerely,

My favourite bit:

...I think the present confusion arises from a
failure to recognise that the limited company is a legal entity separate and distinct from yourself as a legal person.

Somebody please teach this fact to Dawn Primarolo!

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By admin
13th Mar 2000 09:42

VAT will still be chargeable under IR35
I rang my VAT office with this question, and they initially gave me an answer which sounded like Fatema Patwa's response, but said they would provide a written response. When the written response came it was more in line with Bob Beattie's comment.

The government are going to have their cake and eat it. The response was that I would have to charge VAT as if IR35 never happened. The only time the Customs & Excise will treat a contract as a contract of service, rather than a contract for the provision of services, is if the contract is made directly between an employee and the end customer. If the contract is between the personal services company and the end customer VAT will apply as usual.

The government's completely inconsistent treatment by its two organs is particularly unfortunate for those of us who do work for many bodies in the public sector who are unable to re-claim the VAT charged.

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By admin
12th Mar 2000 21:09

VAT and IR35
Whether VAT is payable depends on whether your Company has provided the service under a contract for service or a contract of service. If it is the latter, there can be no VAT. The purpose of IR35 is to make work carried out under a contract of service subject to PAYE, whether it is done directly or through an intermediatry. Therefore if your contract is defined as a contract of service, you will have to argue with Customs and Excise that VAT is not chargeable on it.

For more advice, contact me.

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09th Mar 2000 07:22

The government want to have YOUR cake and eat it
This is one of the inequities of IR35.

A company hit by IR35 will still be regarded by the Customs and Excise as a legitimate business and have to collect VAT.

However, the Inland Revenue will effectively treat the company as an employee of the client, and not a business.

Given the government's and the Inland Revenue's reluctance to engage in meaningful dialogue about IR35 and its consequences, it shows how ill thought out these measures are.

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