Contractors are not getting the right accountancy advice and are paying more tax than they should. A new survey by ContractorCalculator shows that 39% of contractors are paying more salary than they need to, believing that it will protect them against IR35.
“Salary levels should be a discussion between a contractor and their accountant,” maintains James Abbott, founder and head of tax at contractor accountant Abbott Moore. “If taking a low salary, the contractor should understand the advantages and disadvantages and the same is true if the accountant suggests taking a higher salary.
“What this survey also shows is that paying a higher salary to avoid IR35 is like wearing a crash helmet and then crossing the road with your eyes shut,” continues Abbott. “Contractors should be focusing on IR35 best practice such as their contract, working arrangements and aiming for a low business entity tests (BETS) score so that they can halt a potential HMRC IR35 inquiry before it gets off the ground.
“We can’t possibly know exactly how HMRC risk profiles for IR35, but it is unlikely that they will ignore a classic contractor limited company with a high dividend just because the salary is a few thousand more than the minimum.”
56% of contractors think paying over £10k salary takes them off HMRC’s radar
Over 400 contractors and employees participated in the survey that took place over the summer of 2014, and which was designed to discover the latest insights into IR35 following the House of Lords Select Committee on Personal Service Companies (PSCs) inquiry.
The results from contractors have been startling:
- 98% know about IR35, contradicting HMRC’s claims
- 92% fairly familiar or better with IR35, contradicting HMRC claims to Parliament
- 39% unnecessarily paying themselves more than £10,000 salary
- 56% believe a higher salary protects them against IR35
- 9% unaware that a low salary and high dividend is more tax efficient
- 9% consider themselves inside IR35 and pay tax accordingly
The high level of IR35 awareness on the part of contractors directly contradicts HMRC’s claims of widespread ignorance of the legislation when its witnesses gave evidence to the Lords during the inquiry.
And the number of contractors who believe that a higher salary in some way takes them off HMRC’s radar is concerning. The reasons for paying more than £10,000 varied, but some contractors noted that it was on the advice of their accountants.
What this survey also shows is that paying a higher salary to avoid IR35 is like wearing a crash helmet and then crossing the road with your eyes shut
James Abbott, Abbott Moore
Is HMRC really going to ignore dividends of close to £100,000?
30% of the contractor respondents earn a fee income of over £100,000 a year. This is a target that HMRC would find hard to resist as the potential tax yield from an IR35 investigation for those levels of earnings if IR35 applied could be many thousands of pounds.
Yet many pay themselves above the most tax efficient salary because they think it protects them against IR35. It doesn’t.
“We all know that the tax implications of being caught by IR35 are horrendous,” notes Abbott. “Contractors have got to be wary of thinking that paying an extra £1,000 of NICs in a year will protect them from HMRC looking to collect an additional £8,000-£12,000.
“There are some advisers who believe that, when a tax inspector is deciding who to investigate and is faced with two contractors paying different levels of salary, they will choose the one paying the higher dividends. Tax inspectors don’t work like that and you never have two cases that are identical in every respect except for the salary.”
In Abbott’s experience, it is unlikely that HMRC will focus on a contractor paying an £8,000 salary and £70,000 in dividends and ignore a contractor paying a £15,000 salary and £63,000 dividends.
Contractors may simply be receiving poor quality accountancy advice
“ContractorCalculator’s survey shows that some contractors are taking a higher salary and giving the reason as ‘because my accountant tells me to’,” highlights Abbott.
“If contractors are adopting a policy of paying a higher salary on the advice of their accountant, then what is missing is the conversation about the benefits and disadvantages of differing salary levels. If a contractor is being dictated to, then it is wrong.”
Abbott warns contractors that there are much more important issues to be considering, such as the IR35 basics of making sure the contract is IR35 friendly, confirming working practices and trying to score within the low risk band of the BETS.
“Contractors should also be staying off HMRC’s radar in the first place by filing tax paperwork on time and making sure it is accurate with no inconsistencies that might be flagged by the taxman’s powerful analytics and data mining software,” he says.
Abbott concludes: “Good quality expert accountancy advice is widely available and affordable, so contractors should really have no excuse for taking actions that may bring them to HMRC’s attention, especially as nine out of ten believe that they are familiar with IR35.”