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Drawrings treatment Ltd Co. inside IR35

Have a split treatment set of PSC Ltd company accounts to file; inside and outside IR35

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Hi all

I have a set of Limited company accounts to finalise that are split treatment - part of the year outside IR35 and part inside. These are the first set of Inside IR35 accounts that I have completed and am looking for a steer of how to treat the payments the director has made to himself that have been made since being inside IR35? These would all have been subject to personal tax so taking these funds out should not incur further tax and are not obviously dividends.

I'm mulling over making them salary payments and then treating them as a non-deductible expense add back but any insight would be gratefully received! 

Regards

Andy

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Hallerud at Easter
By DJKL
03rd Dec 2019 10:12

"I'm mulling over making them salary payments and then treating them as a non-deductible expense add back but any insight would be gratefully received! "

Why are they non deductible? This is not querying what you say but an honest question towards clarifying my understanding (having never done any contractor accounts)

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Psycho
By Wilson Philips
03rd Dec 2019 10:40

When you say IR35 do you actually mean IR35? If the contracts are private sector then none of the payments should yet be subject to income tax - it is up to your client to apply IR35 rules.

If you are in fact talking about income tax having been deducted under the public sector rules, then there is uncertainty as to how one should treat a relevant salary payment for CT purposes. To date, I have found nothing, and no-one has been able to confirm one way or the other, that says that such a salary cannot be deducted for CT purposes (giving rise to a CT loss in respect of relevant engagements).

PS - one thing that grinds my gears is people that pronounce "drawings" with an additional "r". To see it in writing - ugh.

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Replying to Wilson Philips:
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By Andy Turner
03rd Dec 2019 10:39

Yes, this is a contractor working within IR35 under public sector rules.

I agree re the uncertainty on this. I'm not 100% sure on the treatment of the funds received: whether to show the net payment received (after income tax NI etc. has been deducted) as turnover and then put through the same amount as a 'salary' payment) to offset, or to not include the funds received as income at all and just treat as transfers in and then out again when the director takes this as his net pay although this feels counter intuitive and doesn't leave enough of an audit trail for my liking.

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Replying to Andy Turner:
Psycho
By Wilson Philips
03rd Dec 2019 10:46

HMRC originally advised that relevant turnover should be excluded from the accounts - that is patently nonsense, as it is not up to HMRC to dictate the format of accounts and, in particular, the fact that income tax may have been deducted at source doesn't change the nature of the income - it is turnover of the company.

Current consensus of opinion is that the grossed-up income should be shown as turnover, with the tax deducted as an expense.

The question is then what to do with the payment 'due' to the director/shareholder (it would appear that this needs to be paid to the director/shareholder in some form or other in order to ensure that the turnover is excluded for CT purposes).

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Replying to Wilson Philips:
Hallerud at Easter
By DJKL
03rd Dec 2019 12:30

So in effect Dr Salaries Cr DLA?

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Replying to DJKL:
Psycho
By Wilson Philips
03rd Dec 2019 12:40

That's the obvious solution if the director doesn't need/want the cash.

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Replying to Wilson Philips:
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By Whatisname
03rd Dec 2019 12:22

PS - one thing that grinds my gears is people that pronounce "drawings" with an additional "r". To see it in writing - ugh.

[/quote]

Isn't that what Audi do best?

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By David Heaton
04th Dec 2019 12:38

As this is a public sector contractor case (strictly in Chapter 10, not the IR35 rules in Chapter 8), the PAYE and NICs have been dealt with. Turnover is the amount invoiced (how else do you get to the right VAT figure?) and the amount already taxed by the PS body or agency is deductible.

The PSC can pay on to the worker the net receipt from the PS body as statutorily non-taxable, non-NICable salary or bonus. The legislation actually gives a statutory CT deduction for the payment - see s141A CTA 2009. It seems clear that the intention was to give a deduction for the gross payment (ie, before PAYE & NIC deductions, excluding the employer NICs payable by the PS body or agency), but the words seem in fact to give a CT deduction for the net payment. Ignore this unless HMRC raises the point.

Treat the payments from the work for the PS body that has payrolled them as non-taxable salary, as the law intends. Treat the amount taxed by the PS body as deductible. Deduct the company running expenses from the income from non-Chapter 10 work. Don't forget the student loan and pension obligations of the PSC, if relevant.

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Replying to David Heaton:
Psycho
By Wilson Philips
04th Dec 2019 13:14

With respect, although the effect is the same, section 141A does not actually refer to a deduction. It simply says that you ignore the receipt when calculating the taxable profits. Deduct, exclude, ignore, disregard - it all amounts to the same thing.

What has not been established is the CT treatment of an onward salary payment to the worker.

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