Can HMRC come after you personally for IR35 tax?
A recent decision by the First-tier Tribunal, involving a company set up by the BBC presenter Christa Ackroyd, has received a lot of press. Although this case relates to periods prior to the new rules which took effect in April 2017 and so isn’t a test of their effectiveness, the First-tier Tribunal’s decision raises an important question about where the liability for IR35 tax lies.
The First-tier Tribunal ruled that had Christa Ackroyd contracted for work directly with the BBC, rather than through her company Christa Ackroyd Media Ltd, she would have been an employee. Consequently, IR35 applied to the contract and Christa Ackroyd Media Ltd ought to have accounted for PAYE tax and NI on the money it received from the BBC. The amount owed to HMRC is more than £400,000, but Christa Ackroyd Media Ltd doesn’t appear to have the money to pay it.
So, who will pay the tax bill? If a company can’t pay, the creditors can only enforce payment from the directors through the courts by showing that the unpaid debts resulted from the directors acting improperly. However, HMRC can use tax regulations, subject to certain conditions, to shift the liability for PAYE tax to the director/employee from whom the tax should have been deducted. There are different regulations for NI, but they have a similar effect.
The best practice is to thoroughly review whether IR35 is applicable at the start of a contract rather than after the event and keep records that show your company has considered whether PAYE should apply.