In this example Mr and Mrs A have a personal service company with a total income of £100 000, of which £60,000 is caught by IR35 and £40,000 is not.
Among the company’s costs are ‘other expenses’ of £10,000. These are, by the Inland Revenue’s calculation, properly incurred in the furtherance of the trade and wholly allowable.
It does not take much to figure out that if all the company’s income had been caught by IR35 then the actual business expenses incurred would exceed the flat rate allowance of five per cent.
From there (if one assumes the deemed salary must physically be paid within nine months of the company’s year end in order to get the deduction in the accounts) the company must be making a loss. If this continues on an annual basis then we must have, at some point, an insolvent company and indeed nationwide a number of insolvent companies. Who does not get paid ultimately?
I do not believe the suggested scenario of all income being caught by IR35 is so hard to envisage. Nor do I believe the possibility of actual business expenses incurred exceeding the five per cent allowance is out of the question, particularly given the IT industries repeated points about, in order to remain experts in their field they will incur training costs.
What I do find staggering is that the Revenue would be arrogant enough to publish an example where the actual business expenses exceed the flat rate allowance, given that my above points are not new to them.
To my mind what they seem to be saying is stuff the potential difficulties, it is not our problem, as long as we get what we want out of it. Who made this decision? As a young and perhaps inexperienced accountant I am continually astounded and to some extent embarrassed, by the Revenue’s cavalier attitude towards the taxpaying public.
Please, if I am missing something, tell me
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