Have you and your company been affected by the changes to off-payroll working in the public sector that came into place on 6 April 2017? Are you unsure what it actually means to you and your company if the contract you are in now falls under IR35?
Obviously the main impact is that if the contract does fall under IR35 then PAYE and NIC will be deducted from the invoice amount (net of VAT).
Accounting for this gets a bit tricky.
How to account for payments received under IR35
The company will invoice the agent or public sector organisation.
- They enter the net amount onto their payroll system and deduct the correct PAYE and NIC.
- Your company will then receive the invoiced amount less the PAYE and NIC plus VAT if charged on original invoice.
- VAT should be paid over to HMRC by the company as normal.
- The amount received less VAT is then declared as income in the company accounts with the PAYE/NIC deducted being included as ‘other taxes’.
- No corporation tax will be due on the amounts after the deduction, however any income received outside of IR35 would be taxed as normal.
- To get the money out of the company the director shareholder can either take the net amounts as salary or dividends. There will be no additional personal tax to pay on these amounts.
- If the director takes the money out as a salary this should be reported through RTI as payments which are free on tax and NIC and an FPS should be filed.
The figures
Under IR35 if you invoice and amount of £7,200 (including VAT) per month to the end client and there are no materials and/or expenses included.
Invoiced amount £7,200
VAT (£1,200)
Deemed Direct Payment (DDP) £6,000
The public sector organisation or agent will deduct:
PAYE £1,458
Employee NIC £413
Total PAYE & NIC £1,871
The public sector organisation or agent will then pay Employer NIC of £645.13
The money your company will receive will therefore be:
DDP £6,000
Less PAYE/NIC (£1,871)
Balance £4,129
Plus VAT £1,200
Amount received £5,329
Your accounts will now show the following;
Turnover (12 x £6,000) £72,000
Other taxes (12 x £1,871) (£22,452)
Balance £49,548
(taken as directors salary or dividends)
Corporation tax Nil
As you can appreciate this is a complex area and even took us accountants a while to get our heads around!
So the key for you and your company when taking on a contract under IR35 is to be aware that you will be paying more tax and that tax will be deducted at source rather than paid through corporation tax or self assessment.
You are able to reduce down the DDP (& therefore the PAYE/NI you pay) by any pension contributions made to you through your company pension scheme. You must inform the agency/public sector organisation of your contributions for that month so that they can process that figure on your payslip.
If you feel that all of the contracts that your company will be taking on will fall under IR35 then it may be worth considering seeking alternative options such as working directly for the agency as there may no longer be a financial benefit to contracting through your own company.
If you have any questions on this article and how it affects you and your business, please get in touch here.
JLA Accounting Limited takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss for anyone acting from or refraining from acting as a result of this information can be accepted by JLA Accounting Limited.
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