Emily Coltman of FreeAgent responds to some important IR35 questions posted in Any Answers recently. The first, posted by PALacc, asks for advice following a BBC client falling under IR35 for public sector.
The client has been withdrawing salary and dividends from their company since 6th April 2017. Their contract with the public sector body has now, rightly or wrongly, been deemed to be within IR35 since that date. What should be done about the payments?
The accountant asks whether the dividend payments can effectively be reclassified as salary, by declaring a large salary now and cancelling the dividends from 6th April.
My view would be that this would not be possible, given that the dividend paperwork would (should) have been prepared on a timely basis, showing board minutes and declaring a dividend to be paid out of the company’s distributable reserves. Also, under RTI, salary must be reported to HMRC on or before the date it is paid to the individual.
The client’s engager, the BBC, has said that they will “recoup taxes paid on the payments to the company” - in other words, presumably they will retrospectively review the invoices received from the client, calculate how much tax and NI should have been deducted on these and then seek the repayment of these from the client’s company.
Whether the BBC would be able to claim the repayment back from the client’s company is questionable. According to HMRC, if an employee underpays tax under PAYE, their employer did not take reasonable care to operate PAYE correctly, and the error was not made in good faith, the employee can claim for the employer to be responsible for the underpayment, rather than requiring the employer to make it good. Clearly this is not a usual employer-employee relationship, and the liability may come down to the terms of the contract between the BBC and the company, but this is certainly worth further investigation.
In terms of the payments already taken by the client from his/her company, my opinion would be that the salary and dividends must stand as they have been previously declared. From this point on, the client could withdraw the net amount of their invoices tax-free through the payroll in his/her company, but this could not be changed retrospectively.