Very basic question sorry - Accounting for PAYE & Ees NIC on IR35 deemed payment, & CT position - HELP PLEASE!!

Very basic question sorry - Accounting for PAYE...

Didn't find your answer?

Sorry if this is extremely basic but I have not for a very long time had to deal with a set of accounts where there is a deemed payment under IR35.

I understand the deemed payment and employers NIC aspect. 

Client has a 31/8 year end and told me in May'11 that he realised IR35 applied to a contract in the paye year to 5-4-11.  He does his own payroll and calculated deemed payment and paid over employer's nic, employee's nic and paye on the deemed payment.

Now it comes to the financial accounts for the year ended 31/8/11.  Using the example of a £10,000 deemed payment (after deducting employer's NIC), could somebody please confirm my understanding of the situation below.  There was also an actual payment of say £5,000 to make numbers simple.

On payment of the PAYE & NIC for the deemed payment to HMRC the following would be entered:

Dr Employers NIC (P&L) 1,280  

Dr Director's account for Employees NIC & PAYE element (B/S)

3,100  
CR Bank   4,380

The client has tried accounting for the whole £4,380 as an expense but I cannot see anywhere that the employees NIC and PAYE elements should be an expense of the company.  So, provided the director has not reimbursed the £3,100 then at year-end he/she will have a debit balance of £3,100 owing to the company?  Am I missing something?

When it comes to financial accounts, my understanding is that the accounts show what has actually happened and then the deemed payment is allowed as a deduction in the corporation tax computation.  The employer's NIC element will have already been included in the accounts via the journal above.

Client has accounted for the £4,380 expense above and then wants to account for the whole deemed payment (excl NIC) in the tax comp.  Now, I know that can't be right as he would be getting double relief on £3,100.  Also the £3,100 is not a company expense and due to the deemed payment rules he must individually pay the PAYE &ee's NIC on that despite not getting the payment.  The otherside of this being that he can later take up to £10,000 as a dividend without declaring it. provided the appropriate claim is made by the company.

There seems to be conflicting advice everywhere and I am now getting confused and losing confidence in this as it is an area I am not experienced in.  Could an IR35 experienced person please let me know if my understanding above is correct and if not, what I'm missing?

Thanks a lot for your input.

Replies (5)

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Euan's picture
By Euan MacLennan
08th Nov 2011 12:42

I hate deemed payments

... and never allow my IR35 clients to have them.

However, I would have thought that when the deemed payment of £10,000 was calculated and included on the P60 and P35, the following entries would have been made:

  DR Salary (P&L) £10,000

  DR Er's NIC (P&L) £1,280

    CR Director's current account (BS) £6,900

    CR PAYE (BS) £4,380

and that when the PAYE was paid, the entries would have been:

  DR PAYE (BS) £4,380

    CR Bank (BS) £4,380

The P&L has been hit with just the £11,280 you would expect.

It is the subsequent payment of deemed payments which has always confused me, so I cannot help you with that.

Thanks (1)
Giraffe
By Luke
08th Nov 2011 12:52

Thanks Euan, I hate deemed payments too!!

I hate deemed payments too, and wouldn't have allowed it to happen had I known in advance. 

In this case, the deemed payment is just that 'deemed' rather than actually going to be paid as salary (it will be taken out later via dividends and the claim not to tax dividends route, that bit I am ok with and will show in next years accounts).

Therefore for this year the actual cost in the accounts will only be the employers NIC element of £1,280, as that has been paid as an actual cost (plus the actual salary paid out but we'll leave that out for now as it will confuse matters).  The deemed payment of £10,000 is then adjusted for in the tax computation as it is tax allowable.  So total amount which would be tax deductable for CT would be the £11,280 I agree. 

It is the employees NIC and PAYE that I am struggling with, logic says that it is a cost of the director and so must be CR bank, DR Director's account.  So therefore he must owe the company that money, which can of course be cleared by a dividend but that is a different matter.  Seems a tad unfair though if he hasn't got the actual money as yet, but the company is getting the CT deduction so it's not so unfair I guess.

Any other comments, Euan or anyone?

 

 

Thanks (0)
By Steve Holloway
08th Nov 2011 16:30

I think I have the answer.

I have never got this far with the deemed payment. However, looking at the Anne Redstone book I conclude the following:

For CT purposes the deemed payment occurs on 05.04.11.

The deemed payment is not 'real' and is not an accounting entry as far as the stat accounts are concerned.

In terms of what to do with the EES NIC and PAYE ..Anne Redstone says that although these usually attach to the individual, in this case it is a liability of the service company and is shown as a P & L item in the accounts. It is of course added back for CT as it is the whole deemed payment which is the deductible item.

Payments made in lieu of salary should be classed as dividends and are protected from further taxation (to the extent they do not exceed the net deemed payment) by virtue of Sch 12 para 13 of FA2000 (presumably replaced since the book was written!).

Hope that helps.

 

 

 

 

Thanks (1)
Giraffe
By Luke
08th Nov 2011 19:39

Thanks Steve

Thanks so much for looking that up for me.

The treatment with the ees NIC and PAYE going through the P&L and then being disallowed makes perfect sense and will stop the client moaning that it's not included in the P&L.  It will also stop it showing as a director's account balance which would no doubt not go down well with the client . 

My initial worry though was that if the company paid the PAYE and ees NIC, then that would count as the company settling the employee's tax and therefore that payment would be subject to tax and NIC?  But I have also seen reference to it being the employers liability so that would make sense with what you've said.

I have heard reference to the Anne Redstone book elsewhere but it is unsurprisingly currently unavailable on amazon!

Thanks again

Thanks (0)
By Steve Holloway
09th Nov 2011 08:30

Anne Redstone

It is called 'IR35:Personal Service Companies' but I suspect it has not been reprinted for a good few years now. Mine dates from about 2002 and I know cases have come and gone but it is still for me the definitive work on the basis of the legislation. The problem with IR35 (one of them at least) is that it is simply a sticking plaster that obliterates normal accounting and tax principles.

Thanks (1)