IR35, The BBC and The Treasury = a tax loss for the Treasury? Let’s crunch the numbers….

Christa Ackroyd’s encounter with HMRC and the BBC continues to rumble on with questions being asked regarding the amount of tax she should and shouldn’t have paid. Of course we will never know Ackroyd’s salary had she been employed directly by the BBC. However crunching the numbers brings into focus HMRC’s dubious IR35 policies once again, and enables us to ask whether or not the BBC have potentially facilitated tax loss for the treasury.

The numbers

The determinations under appeal cover tax years 2008-09 to 2012-13. So, we need to cast our tax calculations back to that era. For this example, we’ll take a look at the year 2008-2009. Her contract was for ￡163,233 per year.

HMRC, in all its rhetoric surrounding IR35, compares tax calculations by assuming a contractor charges the same money as a permanent counterpart. This assumption certainly bolsters their arguments and almost sounds credible, but the reality is they are wildly off the mark, and it is simply untrue.

Contractors fees are higher than their permanent counterparts, because market forces set them that way – no-one is going to subject themselves to the risks and uncertainty of self-employment whilst losing their rights that permanent employees get. The BBC would never had paid her that much if she was employed directly. So, we have to ask ourselves, what would the BBC had paid her if she was directly employed, and had all the trappings of employment? And then secondly, how much tax would that have generated compared to the arrangement she finally entered into?

The limited company route

In the tax year 2008-2009 the personal allowance was ￡6035 and there was the 20% and 40% income tax rates. National insurance was 11%, then 1% for employees, and 12.8% for employers. Corporation tax was either 21% or 28% with upper marginal relief in the mix. All dividends were grossed up, the tax credit of 10% was applied, and 32.5% applied to the dividend income that was subject to higher rate tax. Let’s assume business running costs of ￡3500 and a small salary of ￡10,000.

There would be taxes to pay on her small salary, then corporation tax on her profits, and then dividend taxes to pay on the money extracted from her company as income.

All this meant that Christa Ackroyd would have paid tax of ￡55,715.

And salary?

We don’t know what salary she would have been paid if the BBC hired her directly, but we can assume it would have been lower. If she had been paid a salary of exactly ￡116,402 then the amount of taxes paid would have been identical. A smaller salary would have meant less tax paid compared to contracting, and therefore no avoidance occurred. A higher salary would have meant more tax paid, and thus some avoidance.

So, the burning question to discover whether the BBC had facilitated tax avoidance is whether they would have paid her a salary of more than ￡116,402 or less.

We may never know.

____________________________

About ContractorCalculator - your expert guide to contracting. We’ve been online and independent since 1999. Owned by founder and former IT contractor Dave Chaplin, the website receives over 200,000 monthly visitors. With input from employment law experts the team also created a free independent IR35 testing tool, enabling contractors and agencies to check status and facilitate outside-IR35 contracting. Since its first released in 2009 it has been used by over 120,000 contractors.

?To check status, help achieve outside-IR35 contracting, and reduce risk of non-compliance visit IR35testing.co.uk to take your free test now.