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There have been some reports circulating online recently about HMRC monitoring both (a) dividend levels and (b) Dividend to salary ratios and using these as a risk indicator for IR35.

Naturally this leads to the questions of (a) is it true, (b) should we worry and (c) should salary and dividend levels be changed?

Dealing with (a) first, HMRC unsurprisingly don’t confirm all of their risk criteria when assessing company accounts, but clearly low salary/high dividend would be likely to be one criteria.  However, taking a step back, it needs to be borne in mind  many companies who have no IR35 concerns use similar ratios – its quite common, and considered to be sensible tax planning for small businesses – HMRC themselves accept this.  So it can only ever be a very superficial risk assessment.

So (b) should people be worried?  About this issue, no, not specifically.  About IR35 compliance, of course, yes.  Or to put that another way, if you have taken the necessary steps to review your IR35 status and reach reasoned conclusions, probably backed up by contract reviews and insurance, then the fact that HMRC considers low salary / high dividend a risk area shouldn’t worry you.   However, it would be foolhardy to rely on the current low take up of IR35 enquiry work (on the back of Employer Compliance Reviews) and assume that IR35 can be ignored or paid lip service.

In terms of advice to clients (c) we see no need to change the current practice of low salary / high dividend for outside IR35 cases.  For inside IR35 cases, the salary needs to comply with IR35 rules (95% of revenue less direct expenses).   There is no real middle ground.

Underlying this, there is a question of “Should I increase my salary and reduce my dividend to minimise my exposure to IR35?”  – in my view it makes little difference, and to rely on “hiding” isn’t good tax management – get the IR35 fundamentals right, and then take advantage of the same low salary / high dividend regime that most small companies do.

However, as always, accountants advise not decide – its for you to run your company and to set your salary levels, deviating from the defaults we recommend, if you wish – likewise dividend decisions are yours, of course.  I say that not to disown our advice, but to make it clear that as a company director the decisions are yours.