IR35

How to Apply IR35 when working through an Agency.

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Hello

I have a client who trades through a Limited Company and currently receives a small salary to utilize his personal allowance. He is considering taking a contract in the public sector through an agency and the contract would fall within IR35.  I do not have any previous experience in this area and wondered if anyone would be kind enough to offer some advice. I have read the information that HMRC has to offer on their website and tried to get further information from the IR35 helpline but to be honest, the operator did not know the answers to my questions and I was even more confused after the call.

Calculating the deemed employment payment seems straight forward enough and I understand how to calculate the corporation tax liability and what should be included on the SA tax return of the director. My uncertainty arises from the fact that the agency would be deducting Tax and N.I before paying the net amount to the company and I'm unsure how this affects the usual calculations. To help me get a better understanding of what is required and to ascertain if it's worth the client accepting the contract, I would be grateful if anyone could help with the following and maybe provide any further useful information.

1) How the usual calculation of the deemed employment payment differs if PAYE has already been deducted by the agency.

2) What deductions should be made for Corporation Tax purposes.

3) The Self Assessment implications of the above.

Many Thanks

 

 

Replies (37)

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By GR
27th Feb 2017 21:03

1) No deemed calculation is required as the agency has operated payroll.
2) As income will virtually equal expense (i.e. salary) there will be no profit left over for expenses. If there is a small profit accountancy fees could be deducted.
3) The agency will issue a P60 to declare on self assessment.

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By nogammonsinanundoubledgame
28th Feb 2017 08:03

There is a worked example here
https://www.gov.uk/guidance/off-payroll-working-in-the-public-sector-per...

With kind regards
Clint Westwood

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Replying to nogammonsinanundoubledgame:
By Ruddles
28th Feb 2017 08:11

But most think that the CT treatment in that example is wrong.

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By Jamesm2705
28th Feb 2017 11:00

Thank you very much for your assistance. Your replies are very helpful.

The CT calculation in the example seems to suggest that tax is payable on the total of the PAYE deductions if ther are no other expenses taken into account. Are you able to let me know how you think that the calculation should be done please Ruddles. Should the PAYE also be deducted?

The client would be using his own vehicle to travel to various locations and the milage allowance would be a significant amount. Given that that the CT liability is likely to be low or possibly nil, can I simply include the motoring expenses as a deduction against employment income on the directors SA Return?

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Replying to Jamesm2705:
By Ruddles
28th Feb 2017 11:31

It's quite simple - I believe that the correct and logical treatment is to exclude the full amount of the invoiced amount (£6k in HMRC's example) from the CT computation. It makes no sense whatsoever to deduct the net of PAYE/NI amount, which does result in a double tax charge on that part of the invoiced amount.

Assuming no other income/expenses and that the net payment is passed on to the director, leaving the company with no cash, how is the company expected to meet the CT charge arising on the PAYE/NI element left in charge to CT?

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Replying to Ruddles:
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By Jo Nokes
28th Feb 2017 13:25

Having just re-read that guidance, I think HMRC are thinking that the company would only account as sales the net of PAYE amount, hence the suggestion that this is deducted, to arrive at zero taxable income (ignoring any other sources of income). The £6,000 will appear on the P60 and be reported on the SA. If you account for £6,000 income in the company accounts, when only the net was banked, we would have to show the tax deducted on the tax for the year line of the P&L?

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Replying to Jo Nokes:
Euan's picture
By Euan MacLennan
28th Feb 2017 14:04

So, you think that HMRC now sets the accounting standards for limited companies?
Instead of recognising sales of £6,000 as invoiced, the company is now required to recognise the cash received of £4,129, a lower figure arrived at by deducting some taxes completely unrelated to sales.
Hopefully, this will be clarified when the guidance is finalised.

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Replying to Jo Nokes:
By Ruddles
28th Feb 2017 14:21

If the company raises a sales invoice for £6k (with or without VAT) then, regardless of the tax treatment, the only correct accounting treatment (in my view) is to record a sale of £6k in turnover. The tax withheld I would then show as part of the tax charge.

I suppose that HMRC might be thinking (that would be a first) that the company will instead show the tax/NI as an expense and if they're happy to allow it as deductible in computing the taxable profits then of course one should then also exclude only the net amount receieved.

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By Jamesm2705
28th Feb 2017 11:50

Yes, that seems to make more sense, thanks.

Am I correct in thinking that the directors milage allownce could be claimed as an expense against employment income on his SA Return as opposed to through the company?

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Replying to Jamesm2705:
By Ruddles
28th Feb 2017 12:22

Same as with any other company. If the individual has incurred business mileage in his own car he can either claim it back from the company or claim the tax relief through his own tax return.

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Replying to Ruddles:
RedFive
By RedFive
28th Feb 2017 12:58

Ruddles wrote:

Same as with any other company. If the individual has incurred business mileage in his own car he can either claim it back from the company or claim the tax relief through his own tax return.

............but be aware that if public sector and in IR35 then mileage can no longer be claimed as a tax deductible expense

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Replying to RedFive:
By Ruddles
28th Feb 2017 13:00

I had one of Portia's famous brain-farts

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All Paul Accountants in Leeds
By paulinleeds
01st Mar 2017 12:14

I agree with what has been said, with the exception of the recognition in the P&L Account, and especially the tax charge.

My thoughts are to show:
Turnover of £6,000
Salary (Director's Remuneration) £6,000

Dr Bank Account (net salary) £4,129
Cr Director's loan (net salary)£4,129.

VAT is just a timing difference of collection and payment to HMRC, so I've ignored above.

There is no Corporation Tax charge as there is no profits.

In fact, there will most probably be a loss for Accounting fees, bank charges & any motor expenses paid for travel (in the performance of the duties). To me that leaves an insolvent company where the director or banker will never get paid, unless other profits are earned before / after the contact through the public authority.

None of the income from the company (salary) is put on the SA Tax Return.

I know that HMRC says that the Dr salary option, could be replaced by a Dr Dividends option. However, you can only pay dividends from profits. The maximum profits will be £4,129 (with no CT payable).

IF, a dividend was paid through the company on those profits, then it would not go the SA Tax Return.

I note that the mileage (if claimable in the performance of the work) cannot be used to reduce the deemed payment by the public authority, but who says that it cannot be claimed (if applicable) under the normal employment deductions on a SA Tax Return.

Has anyone found out how to run a payroll (for Auto-enrolment, sick pay and other reasons) and not send an RTI. If the payroll is run, with both deemed and actual salary each month, how on earth do you RTI part and not RTI part!!

I really do despair with HMRC!

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Replying to paulinleeds:
By Ruddles
01st Mar 2017 12:50

"I know that HMRC says that the Dr salary option, could be replaced by a Dr Dividends option. However, you can only pay dividends from profits. The maximum profits will be £4,129 (with no CT payable)."

But in that case, what would the TAXABLE profit be, assuming no other income or expenses? If you've recognised turnover of £6,000 how would you deal with the income tax/NI deducted? As a deductible expense?

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Replying to Ruddles:
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By Peter Bromiley
01st Mar 2017 17:02

I think the answer is that no one will use the dividend option. Everyone will use the salary entry - i.e. debit salary £6,000, as in his example, so that there is no profit.

Then the net amount received (say £4,129) goes straight to (credit) the DLA.

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Replying to Peter Bromiley:
By Ruddles
01st Mar 2017 18:07

While the end result may be what is desired, there is a fundamental flaw with that.

Regardless of the tax treatment, the income belongs to the company and to credit the DLA with the amount received is just wrong.

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Replying to paulinleeds:
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By bridyn
01st Mar 2017 21:52

I agree 100% with all your comments. They do really make sense. Since HMRC allows the company to be trading on the basis of fully allowing the net income received as deductible for tax purposes, in their brain don't they think as a company other than salary arise? Companies incur other cost/expenses like the accountancy fee, bank charges, travel and MV e.t.c. How would the company recover these costs? A perpetual loss-making company?

What the HMRC do not want to admit publicly is that they plan to remove food from the tables of smaller accountancy firms that provide services to these small PSCs.

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By redman7
01st Mar 2017 14:25

I may have this completely wrong (likely!) but my understanding of the entries for the new public sector caught IR35 was:

Personal tax – the IR35 caught payments will be declared on the individuals personal tax return as employment income, so the gross pre-VAT income and the tax deducted goes on there. The public sector body will give the PSC a P60 / P45 for the individual to use.

Company tax – from the companies point of view in the example of an invoice of £1,000 +VAT (assuming standard VAT scheme) the entries would be as below – for simplicity and only for illustration, I have assumed £300 is deducted for tax and NI):

Booking of invoice:
Cr DLA £1,000
Cr VAT £200
Dr Trade debtors £1,200

Payment received:
Dr Bank £900 (£1,200 less £300 deducted)
Cr Trade debtors £1,200
Dr DLA £300

Director draws out cash:
Cr Bank £700
Dr DLA £700

So the IR35 income doesn’t touch the companies tax position or P&L at all, and no salary or dividend needs to be processed for the IR35 caught payments.

Have I over-simplified this and got it wrong?

thanks
J

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Replying to redman7:
RedFive
By RedFive
01st Mar 2017 14:38

That's pretty much my understanding though makes one very strange set of accounts if only contract is through public authority.

Why bother running a limited company at all? Oh wait..........I see what's happening here........

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Replying to redman7:
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By Peter Bromiley
01st Mar 2017 17:12

I think (based on other posters who seem well read) that you need to bring in an extra journal: Cr. sales £1,000 Dr salary £1,000.

Then your sales figure ties in with the invoices raised and net outputs in the VAT returns.

We are then left with a sort of fake salary figure in the accounts but nil RTI submissions.

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By alan.falcondale
01st Mar 2017 14:31

I may have the completely wrong end of the stick here, but the part I read was "through an agency "
in which case the agency would be the party making the deductions?

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All Paul Accountants in Leeds
By paulinleeds
02nd Mar 2017 00:12

I’d agree with redman7 and RedFive, but IT DOES touch the P&L account, as turnover and salary. It is still the company’s income and costs.
I think Ruddles is wrong. Income will be the same as salary i.e. no profit and no Corporation Tax.

The PAYE part of the entry is missing, in my opinion, with Ruddles. The director has taken the PAYE personally, so one needs to:
Dr Salary with 1871 (to make it £6,000 gross)
Cr DLA with £1871 (as they’ve paid this personally)

I have run this whole scenario past ACCA technical department this afternoon too. They agreed with my post of 1st Mar 2017 12:14 pm.

An umbrella ‘agency’ may deal with the PAYE and RTI matters for the public authority (e.g. hospital trust), but that does not affect the underlying issue; individual receives £4,129 suffers £1,871 of PAYE, puts £6,000 on his Tax Return with whatever tax deducted and the company does what it wants with the £6,000 gross income.

The company has invoiced £6,000, so that is its turnover. If it agrees to pay £6,000 in salary and the director suffers the PAYE, then the overall entries are:
Cr Turnover £6,000
Dr Salary £6,000

Dr Bank 4,129
Cr DLA £4,129 (his net salary)

I’d agree what is the purpose of the company. Limited liability is one thing, as the contract is definately with the company and is not with the director.

I rang Sage this afternoon. They’d not even heard of this issue and their software cannot cope, despite the 2017-18 update being released last week. So, if you do run a payroll, e.g. for Auto-Enrolment purposes (as the public authority will not deal with this part) or for student loan reasons, Sage cannot deal with this salary. I do see their point, why run a payroll if there is no RTI submission at the end and whatever you do is not put on a P60 or Self Assessment Tax Return…….. but student loan and Auto-Enrolment still may need to be dealt with.

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Replying to paulinleeds:
By Ruddles
01st Mar 2017 17:11

I agree and disagree. You have, as I suggested that you might do, treated the tax deducted by the payer as a tax-deductible expense of the company. I'm not at all confident that there is authority to treat it that way, but I do agree that so long as the legislation permits only the net amount to be excluded from income it is the only means of obtaining a fair result.

I do not agree with the DLA entries. In your example, the director would be entitled to £6k tax-free (the £4,129 that the company is able to transfer to him tax-free plus the £1,871 credit to his DLA).

Assuming your treatment of the tax/NI is correct, I would suggest that the entries should simply be

Cr sales £6,000
Dr cash £4,179
Dr remuneration £1,821

This would leave a profit of £4,179, which would be reduced to £nil following the exclusion from income. The cash can then be paid to the director as a salary or dividend, tax-free (or at least without further deduction of tax).

But this leads to another question - what is the CT treatment of a salary payment? The legislation suggests that the net payment is excluded from the company's income without regard to how the cash is forwarded to the director. And I can see nothing that excludes a deduction for the salary payment. So, having excluded £4,179 from income, a deductible salary payment of the same amount would lead to a tax loss of the same.

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By myke
01st Mar 2017 16:46

If I may ask, what're the financial benefits to the client who falls within the IR35, operates through the limited company & has already paid the PAYE, NICs & agency/umbrella's fee and receives the net? I mean still operating thru the limited company?

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Replying to myke:
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By Peter Bromiley
01st Mar 2017 17:06

I think it depends on the respective deals. If the hourly rate is still more as a PSC limited company than on an Agency payroll, it might still be worth it.

Also, an Umbrella company worker has to pay their own Employer's NI. A PSC limited company worker or an Agency employee does not (at least not directly).

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Replying to myke:
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By Jamesm2705
01st Mar 2017 17:09

Yes, my initial posting was to understand the implications and to decide if it is worth proceeding. Based on the above it appears that if this is the only income for the company and ifthe client has the option to work directly through the agency then it looks like I will be losing the client or at best be charging accordingly to claim for any expenses through his SA return.

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By Mildred
01st Mar 2017 17:12

Why complicate issue???
The agency is required to payroll your client ( ie pay the associated income tax and nics) just like they will do for an employee.

Therefore , I’ll treat as individual's employment income and not bring into CT computation of limited company but the client’s self assessment return (grossed up of course etc etc).... which is the whole point of this IR35 off-payrolling changes made. Case closed.

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Replying to Mildred:
RedFive
By RedFive
01st Mar 2017 17:32

But the limited company is the one invoicing so you are right in the end result but how to reflect in accounts and tax comp is not so straightforward.

As evidenced by about 7 different interpretations so far all of which be right.

I can see HMRC opening enquiries in the future due to dividends not being declared, or turnover on accounts being way out from tax comp, or potentially years of losses yet high sales.....all of which would be right but we all know left hand doesn't know what right hand does.

This is a great discussion and in my opinion exactly what Aweb should be for.

It's a sorry state of affairs though when HMRC end up with this sort of cats whiskers legislation that could have been drawn up by a five year old. Not that we even have that definitely yet.

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Replying to RedFive:
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By Mildred
01st Mar 2017 17:53

Invoicing only if an umbrella company otherwise no need for agency to give work to client through the limited company in the first place.

BTW, I completely agree with you......'sorry state of affairs' and legislation in my opinion.

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Replying to Mildred:
By Ruddles
01st Mar 2017 18:13

Try that and I think you'll find the case is not closed. It might seem like an equitable result but it's not correct.

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Replying to Ruddles:
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By Mildred
02nd Mar 2017 11:54

Ruddles , we admonish with supporting reason. How is it wrong?
Could not be more straight-forward. Individual accepts work from agency directly not via Ltd co. Agency treats as employee and payrolls accordingly.
Individual treats net pay as employment income (grossed up) and agency payroll charges, as employment expenses in tax return. This should also be explained in the tax return.
hence still maintain ‘case closed’
The bottom line is that (which I think is the idea behind the new legislation) it is no longer tax efficient nor beneficial for individuals (Directors) to take such work through the ltd company nor an independent umbrella company.

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By Duncan Cameron
01st Mar 2017 18:46

I shall stick my oar in.

I think some perspicacity can be gleaned from assuming that the worker, director and shareholder are separate unconnected people.

I have not read the relevant law and what I say may be rubbish.

However, using HMRC’s example:
1. The company’s t/o is £6K.
2. It can make a tax-free payment to the worker of the net deemed salary (£4,129). This payment should be tax deductible. It seems sensible that this sum is paid to the worker (especially if worker, director and shareholder are, like the Trinity, one and the same).
3. The company’s customer has underpaid its invoice by £1,871 (ignoring VAT for a moment) that will never be paid. This is a bad debt & should be debited to the P&L.
4. This gives nil profit and nil CT due.
5. As there is no profit there can be no dividends from these transactions.
6. The worker is taxed on the deemed salary of £6K and is given credit in his tax return for the PAYE suffered.
7. No debits are made to any loan a/cs and thus there are no S455 issues).

Now for VAT.

It seems to me, absent rules to the contrary, that the company is due bad debt relief on the sum not paid (£1,871) which is worth £312. This relief is automatic if on cash accounting and can be claimed if VAT is done ‘properly’. This would give a profit before tax of £312. Which seems to take some of the sting out these rules. Does this seem right?

I should add that I know of no legal obligation on the worker to recompense the company for the tax and NIC deducted from the payment of its invoice. This is why journals debiting 'salary' or DL a/c and crediting trade debtors should not be made. If there were a debit to salary of £1,871 then there is a danger that HMRC will want to tax that sum.

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Replying to Duncan Cameron:
By Ruddles
01st Mar 2017 19:02

I think that we're at risk of wandering out of the back of the wardrobe, trying to come up with a solution to fit the problem (or vice versa). To describe the tax withheld as a bad debt is just nonsense.

In principle, the proposed rules are not too far off the mark. The only real points of confusion are:

The amount of already taxed income to be excluded from the company's income when calculating CT profits.

What to do with the salary cost if salary is the chosen method of paying the cash over to the director (which, absent suitable provision, would lead to a double deduction when combined with the exclusion of income).

All oher suggestions - bad debts, taking straight to DLA, ignoring accounts/CT altogether etc are, while perhaps achieving a fair outcome, sadly completely out of step with the legislation and should be disregarded as flights of fantasy.

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By Ros Martin
02nd Mar 2017 09:11

I don't really want to add any more confusion to this argument but one thing I am concerned about is how you get the NI record straight. HMRC are clear in their guidance that the PAYE and NIC paid by the agency/client do not give entitlement to any benefits and indicate that a salary has to be paid out of the PSC in order to get that entitlement. If none of the salary in the PSC is taxable due to the director being able to draw the already taxed money out, do you have to pay a salary with an NT code attached - and then generate a P60 which is put on the tax return but then will be picked up by SA/MTD as salary that has not been correctly taxed? Am I being really stupid? Is there an obvious way in which you can get the NI benefit to protect pension entitlement as similar.

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Replying to Ros Martin:
RedFive
By RedFive
02nd Mar 2017 09:35

Hi Ros, as per the guidance here

https://www.gov.uk/guidance/off-payroll-working-in-the-public-sector-per...

It states that the payments made by the fee payer will contribute to state benefit entitlement.

"From 6 April 2017, where you provide your services to a public authority client, new rules apply, the client, agency or other third party who pays you (the fee-payer) will deduct Income Tax and primary Class 1 National Insurance contributions (NICs) from your fees.
The fee-payer calculates a deemed direct payment and pays Income Tax and Class 1 primary NICs arising on it over to HM Revenue and Customs (HMRC) on your behalf. >>>>>Those payments are reflected on your tax records and contribute to your state benefit entitlement.<<<< They will also pay secondary Class 1 NICs on the deemed earnings."

Which guidance were you referring to?

I'm still none the wiser as to how/why you would put a no tax salary through the companies payroll for the withdrawal. Seems better to use what they call a 'dividend' though that doesn't meet my definition of a dividend in that it is not out of distributable reserves and would not be subject to the 'dividend tax'.

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Replying to RedFive:
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By Ros Martin
02nd Mar 2017 09:45

I was looking at the guidance published on 6 December 2016 with the draft legislation. This was updated on 1 March and is different from the initial guidance (which I printed out) - in the original guidance it specifically referred to having to pay a salary out the PSC to maintain entitlement to state benefits. So it would appear they have changed their mind as the guidance you quote was published on 3 Feb. Well, that is a relief! But once again does seem to suggest that HMRC are slightly making this up as they go along.

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By alan.falcondale
02nd Mar 2017 09:37

Just a thought - if the payment is deemed tax and NI-able....will this be reflected in the Apprenticeship levy calculation as well?

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