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Company accounting for Income from IR35 contract

IT contractor's own company receives income net of PAYE & NIC under IR35 for Public sector work

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An IT contractor has set up his own company and works for a recruitment agency on a public sector contract. The agency deducts PAYE and NIC as assignment considered within IR35 and then pays the net wages to the contractor's company. He then draws this money out of his own company.

Question: How should this be correctly accounted for in the contractor's company? Do the net wages paid in just go as a credit to the director's loan account, which he then withdrawals out because all the income has already been taxed? ie nothing goes then to sales? The director receives a P60 from the agency so that just goes on his own self assessment return.

Thank you for any assistance

 

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By Matrix
19th Sep 2018 11:19

You exclude sales which have been subject to the off payroll rules, you will need to dig them out to establish the exact treatment, I posted the link recently.

Check that the agency have not deducted employer's NI since this is unlawful.

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Replying to Matrix:
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By Wanderer
19th Sep 2018 13:27

Matrix wrote:

You exclude sales which have been subject to the off payroll rules,

Not quite what this says:-
https://www.gov.uk/government/publications/off-payroll-working-in-the-pu...
"13. Accounts of the intermediary PSC
The accounts of the PSC should reflect the amount that the company receives. That is the net amount after the tax and NICs have been deducted.

From the example above we established that from an invoiced amount of £7200 the fee payer would physically pay an amount of £5329 to the PSC. This included an amount of VAT (£1200) therefore the corporate accounts would reflect the VAT exclusive amount of £4129 in the calculation of turnover for Corporation Tax purposes."

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ALISK
By atleastisoundknowledgable...
19th Sep 2018 18:10

There’s been a million threads on this. As with accounting for profit on a vat scheme, everyone will do it slightly differently.

Some will show the full turnover and equivalent ‘wage’ (that isn’t payrolled or taxable on the individual). Some will show the turnover but no expense, then remove the turnover in the ct comp.
we’ll be doing our first set in a few months, probably using the former method. As long as you don’t pay ct on it, the correct vat is paid to HMRC and the net receipt is paid to the individual (non-taxable), just pick whichever method you fancy.

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By johnt27
20th Sep 2018 20:54

Disagree with all the posts on here as do ICAEW. Contractor sales should be recorded gross with the PAYE and NIC deducted recorded as a staff cost.

https://www.icaew.com/technical/practice-resources/icaew-practice-suppor...

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Replying to johnt27:
By Ruddles
20th Sep 2018 22:32

That is the only sensible solution.

If a company raises an invoice for £10k then £10k is its turnover. It is not HMRC’s place to dictate how accounts should be prepared and their suggestion that turnover should be presented net of taxes withheld is utter bollox, but that’s because no-one thought of the accounting consequences when drafting this ridiculous piece of legislation.

Although thinking about it further:

The principle behind the legislation is that the contractor is effectively an employee of the end-client, hence the application of PAYE/NI. If HMRC take that view then it stands to reason that the same income should not be subject to both PAYE and CT. I therefore propose that the accounts include gross income to comply with accounting principles (and the tax as an expense) but both are added back in full in the CT comp (broadly, one of the alternatives above).

Therefore, while I agree with ICAEW on the accounting treatment it does not adequately address the tax issues.

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Replying to johnt27:
ALISK
By atleastisoundknowledgable...
21st Sep 2018 07:59

Isn’t that how I said I’d be doing it?

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By cde123
21st Sep 2018 16:16

Thank you for these replies.

Just on an additional point then with regards to VAT registration, since the income from IR35 contracts needs to be shown within Turnover, would you therefore agree that the amounts received from IR35 contracts should be included within the calculation of total sales in establishing the requirement to register for VAT at £85000 of sales?

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By BelGrant
24th Sep 2018 11:51

How can his PSC company receive net income and then treat it as gross (that belongs to the company and not to him personally?) Under this arrangement, having a limited company is entirely redundant. May as well sign on directly to the employment business as their temp employee, or get the actual gross paid into a reputable brollie who can be guaranteed to treat all income received as taxable after legit' expenses.

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Replying to BelGrant:
ALISK
By atleastisoundknowledgable...
04th Oct 2018 23:02

BelGrant wrote:

How can his PSC company receive net income and then treat it as gross (that belongs to the company and not to him personally?)

Ask HM Treasury.

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By Tony Maber
24th Sep 2018 12:37

What about Employers NI? Is this to be paid by the contractor's company - thereby reducing the amount available to the director?

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Replying to Tony Maber:
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By Vince54
04th Oct 2018 22:21

Employers NI should be paid by the "fee payer" not the contractor's company. However I have read of cases where the fee payer has deducted the employers NI from the amount paid over to the contractor's company. Very naughty!

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By mkowl
24th Sep 2018 14:24

Well just doing my only set of accounts

To date
Dr Sales ledger
Cr VAT
Cr sales
Gross invoice

Dr Bank
Cr Sales ledger
with net PSB proceeds

Cr Sales ledger
Dr deduction from turnover
with the PAYE / NI element

Cr Bank / DLA
Dr Deemed salary paid

for the net pay already taxed

this nets the P & L to Nil for the PSC contract and for CT as well

Confusion in this is the spouse as a normal contract also going through the ltd co.

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